Rachel Reeves faces growing pressure as market turmoil raises questions over Labour's fiscal credibility
14 January 2025, 08:23
Starmer backs Reeves until 2029: LBC analysis
Rachel Reeves is set to attend a Cabinet meeting at Downing Street on Tuesday amid intensifying market turbulence and mounting questions over her position as Chancellor.
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The embattled Chancellor’s future was cast into doubt after Sir Keir Starmer appeared to hedge his support for her, expressing confidence in her capabilities but pointedly refusing to guarantee she would remain in her post until the next general election.
Hours later, Downing Street sought to quell speculation, stating that Ms Reeves would remain Chancellor for “the whole of this Parliament.”
The Chancellor returned from a trip to China to find fresh questions over the Government’s ability to adhere to its own fiscal rules, amid rising borrowing costs and fears of economic stagnation.
“Either he ties his hands and keeps her into 2029, or he opens speculation as to her position. Unfortunately, Starmer seems to have bungled it and done both at the same time,” Simon Finkelstein, a former special adviser to Jeremy Hunt and Dominic Raab told LBC's Nick Ferrari at Breakfast.
"It's worth reflecting how remarkable, since July, the election in which Rachel Reeves admittedly was very, very critical to, and the economic strategy that got them elected, they were already speculating over her future. So it's a really remarkable state of affairs," he told LBC.
The pound fell to a fresh 14-month low on Monday, at 1.21 dollars. It regained some ground later in trading but still finished 0.3% lower at 1.216 when London's markets closed.
UK government bonds - also known as gilts - saw 10-year yields rise to fresh highs not seen since 2008. They were five basis points higher at 4.89% at the end of trading.
Longer-term borrowing costs were also higher, with the yield on 30-year gilts up three basis points at 5.45%, after striking its highest level for 27 years earlier on Monday.
Rising yields, which move inversely to bond prices, signal investors’ declining willingness to hold UK debt – a warning sign that the Government is grappling with a credibility crisis.
Sir Keir Starmer has moved to shore up the No 10 policy unit, enlisting Olaf Henricson-Bell, a former Treasury communications chief under three Conservative chancellors, to lend his expertise. But insiders suggest more concrete action may be required to bolster market confidence.
Speaking to LBC's Nick Ferrari at Breakfast, Mr Finkelstein suggested that Ms Reeves is likely to survive, for now:
“If I was a betting man, I’d say Rachel Reeves lasts the distance. Otherwise, Keir Starmer has a Liz Truss problem. As soon as you get rid of your Chancellor, the focus immediately shifts onto you. This wasn’t simply a budget made in the Treasury – it was signed off by Downing Street.
“That said, we’re likely to see serious spending cuts in March’s Budget if the Chancellor is to meet her fiscal rules."
The Prime Minister has vowed to take a “ruthless” approach to public spending, with Downing Street insisting “nothing is off the table” as departments explore budget cuts.
Meanwhile, political challenges are mounting. A YouGov poll for Sky News over the weekend revealed that Labour’s lead has narrowed to a single percentage point, with the party polling at 26 per cent, Reform UK at 25 per cent, and the Conservatives trailing at 22 per cent.
Mr Finkelstein criticised Labour’s performance since taking office, describing it as a “very poor start.”
"And I think really the critical problem has been trust. We had a Labour Party that before the election said they would not raise taxes, specifically national insurance, they would reform public services, not pour ever greater sums in.
"And they had ironclad fiscal rules. And unfortunately, since then, what we've seen is tax has gone up, specifically national Insurance, fiscal rules have been changed and lots, lots of more borrowing to fund public services."
With March’s Budget on the horizon, Ms Reeves’ stewardship of the Treasury is set to come under even closer scrutiny, as Labour faces the challenge of maintaining credibility in the eyes of the markets – and the voters.
