By Cameron Brown, Senior Advisor at Pagefield and former Special Adviser to Chancellor Jeremy Hunt (2022-24)
As the Spring Forecast approaches, the mood in Westminster is shifting. Just a few months ago, Labour was riding high on its electoral mandate, promising to bring economic stability after years of rollercoaster politics and fiscal misadventures. Now, the Treasury is walking a fiscal tightrope, trying to deliver the record public investment promised to the public, while keeping Britain’s creditors sweet.
Then there’s the Office for Budget Responsibility – single-handedly keeping the Chancellor’s stress levels higher than inflation. They have been drip-feeding bad news to the Treasury on a near-weekly basis, and it doesn’t look good.
Growth forecasts are set for a downgrade. The modest £9.9 billion of fiscal ‘headroom’—essentially the government’s financial buffer—now appears to have been wiped out by higher debt servicing costs. Inflation is proving more sticky, and interest rates may remain higher for longer. Unless historic data is miraculously revised upwards, Britain would need quarterly growth of 0.75%—a rarity outside economic booms by British standards. Short of divine intervention, that’s not happening.
Reeves had pinned much of her fiscal credibility on her Growth Strategy persuading the OBR to take a more optimistic view. But here’s the snag: the Treasury left itself with barely any wiggle room within its own fiscal rules—rules that, by historical standards, are already quite relaxed. If the Chancellor is about to breach her fiscal rules, she will be forced to respond this Spring.
With economic growth stalling, borrowing costs creeping up, and rising public spending locked in, the prospect of a further fiscal intervention is growing. Reeves will be hoping for a helping hand from the Bank of England—namely, lower inflation on 19 February—so it feels comfortable enough to start cutting rates more aggressively. Even a minor market movement can create significant fiscal space for the Treasury. But betting the house on the Bank saving the day? Not exactly a foolproof strategy.
Of course, Labour didn’t inherit a golden economic legacy. After a decade of sluggish growth and being battered by two global shocks, Reeves took on a tough fiscal landscape. But since the Autumn Budget, negative sentiment has rattled businesses. Ministers’ words matter, and boardrooms have reacted. Blaming the last government is politically convenient but economically costly. Sooner or later, the public will expect Labour to take ownership – Reeves is betting that moment won’t come just yet.
For UK plc, the road ahead remains uncertain. While the Bank of England’s 0.25 point rate cut might offer a minor reprieve on borrowing costs, business confidence remains fragile. With inflation still above target and investment sluggish, many boardrooms are choosing to sit on their hands rather than expand. Throw in an upcoming rise in employer National Insurance contributions, and smaller businesses especially are facing a perfect storm of uncertainty.
The Chancellor’s immediate challenge is how to respond. The best-case scenario is persuading the OBR to upgrade its medium-term forecasts—or, at the very least, avoid significant downgrades. That would buy Labour some time and delay the need for immediate fiscal tightening. Treasury officials are pushing hard for the OBR to ‘score’ some growth enhancing supply-side reforms—planning liberalisation, pension fund reform, tackling economic inactivity, and AI adoption. But the OBR, ever the sceptic, may not play along.
The alternative? Announcing measures to rebuild fiscal headroom at the Spring Forecast, most likely through spending restraint – or ‘cuts’, to you and I. But that would mean breaking Labour’s commitment to a single fiscal event per year—a move that could set off alarm bells in the City. The opposition would pounce, gleefully branding Labour’s economic plan a failure. And it’s hard to imagine Labour’s newly elected MPs welcoming a media narrative about ‘Austerity 2.0’ with open arms.
The trouble with punting tough choices into the long grass is that markets don’t wait patiently. Bond traders can smell hesitation a mile away, and if they sense the government is dithering—or promising spending cuts that never arrive—borrowing costs could rise further still. That could leave Labour in the worst possible position: forced into spending cuts not by choice, but because the markets demand it – akin to Chancellor Hunt’s mini-budget reversal in Autumn 2022.
If Reeves can navigate this fiscal minefield without spooking the markets or abandoning Labour’s core pledges to the public, she’ll cement her credibility and reap the political dividends. If not, the Spring Forecast could mark the beginning of Labour’s economic reckoning.
