Time to worry about the wellbeing of Chancellor Rachel Reeves, for the turmoil engulfing her is clearly affecting her judgement as she stumbles from pillar to post in what has been a long, debilitating – and entirely self-inflicted – run up to the Budget in 11 days time.
There is an increasingly haunted, distraught, even helpless look about her. She must know her second Budget is likely to be her last. The sound of once distant tumbrils heralding the end of her career in the top rank of politics grows ever closer and louder.
Just when you think it couldn’t get worse for her – it does. To depict her tenure at the Treasury as reminiscent of The Gang That Couldn’t Shoot Straight is a calumny on that comically incompetent bunch from the film of the same name.
After weeks of pitch-rolling to prepare us for a manifesto-busting increase in income tax, including a speech, a press conference and a broadcast interview – all unprecedented in the weeks before a Budget – Reeves suddenly let it be known late this week that plans to raise income tax have been ripped up.
Instead, the Chancellor will opt for what’s being called a ‘smorgasbord’ of smaller tax rises to restore some semblance of fiscal prudence to the public finances.
The official excuse is that these finances are not in as bad a state as feared. So the Office for Budget Responsibility, which was only recently tasked with including an income tax rise in its economic forecast, has been told no longer to factor one into its calculations.
If you believe that explanation, then you probably also believe No 10’s claim not to have been bad-mouthing Health Secretary Wes Streeting.
It is, frankly, incredible – and only adds to the mounting sense that you can’t believe a word this Government says.
Reeves has been warned off income tax rises by Keir Starmer because he fears his premiership would not survive such a blatant manifesto breach
For a start, the Treasury is still briefing that there’s a £20billion black hole to fill and that the Chancellor needs an additional £15billion of ‘headroom’, given the previous £10billion margin she created in her first Budget evaporated within months.
So, since more borrowing is out of the question and Labour backbenchers won’t let her cut spending, Reeves will still need to raise around £35billion in extra taxes.
That’s an awfully big smorgasbord.
No sane Chancellor would voluntarily go down this route. Small tax rises have been the bane of previous occupants of 11 Downing Street. They are the very definition of ‘huge pain for little gain’, regularly resulting in a major row with some vocal interest or lobby while raising less revenue than expected.
Just ask George Osborne about his bruising experience with the notorious ‘pasty tax’ when he was Chancellor back in 2012. Or, if that’s too long ago, look at the battering the current Government endured when it ended the inheritance tax exemption for farmers – all for a measly £500million more in revenues.
To base a whole Budget – one which needs to raise £35billion, no less – on such expedients is tantamount to a death wish. Which probably accounts for the Chancellor’s troubled demeanour.
The blunt truth is that she is no longer in charge of the Budget process. The latest shambles merely underlines that.
Reeves has been warned off income tax rises by Keir Starmer because he fears his premiership would not survive such a blatant manifesto breach.
Even a week ago he was prepared to take the risk. He’d decided the impact of a big income tax rise on bolstering the public finances would be worth it. Then came Downing Street’s cack-handed efforts to diss his leadership rival, the Health Secretary Wes Streeting, a strategy so clumsily executed that it immediately backfired on Starmer himself.
Labour backbenchers, who’d decided a while back he was useless at politics and, as I wrote last week, are only divided on when – not if – he should go, concluded that he was truly beyond redemption. Starmer realised he was now too weak to survive an increase in income tax. Reeves was told to desist. Hence the mother of all last-minute U-turns.
The Chancellor is now a much diminished figure. It is possible to feel some sympathy for her – but not much. She swept into the Treasury with an inflated view of her own abilities, which are modest, and quickly became the author of her own misfortunes. She has never really recovered from her disastrous first Budget – just like the British economy.
But nobody would relish being in her current predicament, excruciatingly wedged between the rigours of the bond markets, where governments go to borrow (and which think Reeves has already borrowed too much), and the economic illiteracy of Labour’s soft Left, increasingly calling the Government’s shots with profligate demands for even more spending.
It is possible to feel some sympathy for her – but not much. She swept into the Treasury with an inflated view of her own abilities, which are modest, and quickly became the author of her own misfortunes
The bond markets liked the plan to increase income tax. Those who lend us money care little for manifesto promises or average families squeezed by tax rises. Their priority is for the Government to demonstrate its fiscal prudence with credible tax rises, not more borrowing.
For our lenders, a rise in income tax would do the trick. Reeves was warned that if she reneged there would be a price to pay. And so it has proved.
The moment the markets opened yesterday gilt yields, effectively the interest the Government pays to borrow, started to surge. Just for good measure, the pound hit a two-year low against the euro and the stock market fell too.
This was no meltdown and there was some clawback as the day progressed. But the markets’ message to Reeves was clear: we don’t like the direction in which you’re now going.
The grim economic backdrop doesn’t help. On Thursday morning, Reeves chose to repeat the boast that Britain was the fastest growing economy in the G7 group of rich market economies.
That she did so on the very day official figures showed the economy had hit the buffers can only be seen as further evidence she’s losing her grip.
Labour ministers have been warned for months, not least in this column, to ditch the boast because it would come back to haunt them. Now it has. The reality is that the UK economy has spent 2025 grinding to a halt.
In the first quarter of the year, the economy grew by a healthy 0.7 per cent. But it was pumped up by Reeves’s spend, spend, spend Budget and companies increasing production before Donald Trump’s tariffs started to bite. It was never going to last. Nor did it.
By the second quarter, growth had slowed to 0.3 per cent. But worse was to come. The initial estimate for growth in the most recent third quarter is just 0.1 per cent. The economy actually contracted by 0.1 per cent in September. Growth in GDP per capita – a rough measure of living standards – is now zero. So much for making people better off.
Unemployment has just risen sharply to 5 per cent, up from 4.2 per cent when Labour took office, during which time 180,000 payrolled jobs have disappeared. Inflation is almost twice the Bank of England’s 2 per cent target. At least that’s one economic metric with which we do lead the G7.
There’s little sign Reeves will put any of this right come the Budget. The Government has no spare cash but the Labour air is still thick with calls for yet more spending – scrap the two-child benefit cap, pay the Waspi women, fill the coffers of Brussels for more ‘pay-to-play’ access to the European single market. Yet let’s not increase income tax, even if it is the only credible way of paying for all this.
It is the agenda of Labour’s soft Left – and Starmer is now minded to follow it, if only in a desperate effort to save his own skin.
As this dawns on the debt markets and Reeves’s myriad tax rises start to unwind in the aftermath of the Budget, there is every chance of a financial crisis, perhaps even this side of Christmas.
Reeves, of course, will be the sacrificial lamb. Team Starmer may be useless but it is also ruthless. It will not hesitate to dump her. But Reeves is the Prime Minister’s air-raid shelter.
If she goes – and her protective cover with it – will Starmer be far behind?
