Labour MPs blaming Rachel Reeves over welfare cuts are like teenagers blaming their mum for telling them to wear a coat when there are bloody great storm clouds on the horizon. It’s silly and it won’t save them from getting soaked.
But this is emerging as part of the blame game over Labour’s welfare debacle, where the party’s MPs forced the government to shred its own welfare bill by threatening to vote it down at second reading. ‘She must be toast,’ a Labour MP told the FT. The Times quotes a senior Labour source accusing Reeves of having ‘very little political acumen’. The argument, apparently, is that Reeves is at fault for trying to find £5 billion of savings on a welfare bill that is currently on course to reach £373 billion by the end of the decade – or 10.8 per cent of GDP.
Instead of thanking Reeves for her realism, her colleagues would rather throw her under the bus
Reeves, of course, isn’t the problem here. She’s a Labour politician who actually understands that governing means dealing with the world as it is, not as you might wish it to be. The backlash against her following the government’s welfare U-turn is pure displacement activity – the product of a party that still hasn’t come to terms with the hard facts of the public finances.
A lot of this comes back to Reeves’ fiscal rules, which attempt to limit spending and borrowing. To listen to some of her critics, you’d think these rules were just some personal foible or idiosyncrasy of Reeves, rather than an attempt to maintain necessary market credibility in the face of fiscal facts.
Those facts are harsh. Britain’s public finances are structurally weak. The UK has, for years, been spending more than it raises in tax, and the gap is widening. According to the IFS, even on current forecasts, the UK is on course to borrow around £80 billion a year by the end of this parliament – not to fund investment, but just to cover day-to-day spending. Debt interest payments alone are projected to exceed £100 billion this year, more than is spent on any single public service apart from the NHS.
Meanwhile, a shrinking working-age population, poor productivity, and rising demand for healthcare mean the long-term pressures on spending are only getting worse. Britain is, in effect, running a welfare state too big for the tax base that supports it – and pretending that unpleasant choices to square this circle can be indefinitely postponed. The £5 billion climbdown on Personal Independence Payment reforms only makes that harder.
That money now has to be found. And Reeves, as Chancellor, has only three real options. First, tax rises. But Labour has boxed itself in here, pledging not to raise income tax, National Insurance or VAT because those taxes hurt voters and growth. Other taxes are available, of course, but most of them fall either on businesses (and thus growth) or on voters (and thus political capital). Second option: spending cuts. Good luck selling those to a PLP that just mutinied over modest benefit reforms. And third, more borrowing – the perennial fantasy of some on the Labour benches.
But borrowing isn’t free. The UK already spends more than £100 billion a year on debt interest, more than on schools or policing. Every pound added to the debt pile via borrowing requires an investor somewhere to buy gilts – and the rate of interest investors demand on those gilts depends on their confidence in Labour’s ability to manage the public finances and the economy. In the dry words of the National Institute for Economic and Social Research:
If investors have doubts, they will substitute UK bonds for other bonds and borrowing rates will escalate as the market quickly becomes illiquid.
That’s the real danger Labour faces. Not a few angry backbenchers, but a jittery bond market. And unlike the PLP, the bond market doesn’t care about your values, your mandate or your historical grievances. It cares about numbers – and credibility. Lose that, and you lose control.
This is the storm Rachel Reeves is trying to steer Labour through. And she knows how high the stakes are. The last time a British government lost the confidence of the bond market, the resulting storm hit the pound, mortgage rates and swept Liz Truss away with it. The UK had a brief glimpse into the gilt market abyss in January. Reeves is trying to ensure that doesn’t happen again.
Her critics inside Labour, meanwhile, are still pretending that if only the Chancellor were a bit more compassionate or ‘progressive’, the money would somehow appear. This is magical thinking. The painful truth is there is no compassionate solution to Britain’s structural fiscal problems. Only trade-offs, hard choices, and economic reality.
This is what Reeves is trying to force the party to understand. And instead of thanking her for her realism, some of her colleagues would rather throw her under the bus.
The Labour party spent a long time earning the trust of the public and the markets on economic competence. After just one year of the hard, difficult reality of government, it’s already flirting with throwing it all away. Put your coat on, kids. There is worse weather ahead.
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