Rachel Reeves is making the same mistake as Liz Truss

Rachel Reeves returns from China this morning to face growing accusations that she has lost her grip on the public finances. This latest bond market crisis has brought into question whether the Chancellor is at risk of – or has already – broken her own fiscal rules. Capital Economics reports that a surge in gilt yields – which are at their highest levels since the financial crash – means that her £12 billion of fiscal headroom is now gone. The Treasury will be desperately hoping that something, anything, calms the markets this week and sees borrowing costs start to fall. Reports that the Chancellor has called on ministers to come up with some quick and spectacular ideas to grow the economy over the weekend are unlikely to cut it.

Unsurprisingly the return of a jittery bond market has reignited the debate about who, exactly, ‘crashed the economy’. Liz Truss sees this not just as a moment to return the treatment Keir Starmer showed her in 2022, but to clear her name. ‘Labour, the [Bank of England] and the media establishment smeared my budget and forced a reversal. Now, they’ve plunged the country into economic crisis,’ claims the former prime minister.

It’s a claim that, still, doesn’t add up. The last week has shown that there doesn’t have to be any kind of grand plot against a politician for the markets to take a disliking to the government’s economic agenda. Their verdict isn’t some ideological rebuke or criticism of any particular philosophy. Rather, it's an indication that the numbers in your Budget aren’t adding up. If anything, this latest crisis mirrors the 2022 crisis more than either Truss or Reeves would like to admit. In both cases, they insisted that their plans to borrow and spend were responsible. In both cases, markets decided they were not.

‘Mirror Mirror on the wall, who crashed the bond markets worst of all?’ pic.twitter.com/qQJmC95AyR

— Sir Jake Berry (@JakeBerry) January 9, 2025

Re-reading analysis from the time in question is probably a better way of walking down memory lane. But it’s worth reminding ourselves of the key differences between 2022 and the start of 2025. These are not identical situations. 

Truss’s decision to cut out practically every branch and institution in government from knowing the details of her mini-Budget meant that the response to it was far more explosive (many members of her senior team in No. 10 didn’t know what was coming). Markets were mainly reacting to Truss’s request to borrow roughly £100 billion in one year to subsidise all household energy costs – just as borrowing was becoming much more expensive. Interest rates were rising around the world in response to the inflation crisis. 

Markets decided this was an expensive bet, and borrowing costs surged. It’s a point Truss has never made herself. Rather, the former prime minister has tried to reframe those infamous weeks as an exercise in fiscal prudence. It was nothing of the sort. Nor was Labour’s first Budget, but different circumstances mean this crisis has been a slow burn, rather than an explosive event.

Reeves also opted for significant borrowing, asking for £140 billion more over the next five years, with spending increases front-loaded into the first two years of government. A staggering figure, even bigger than Truss’s request. But unlike 2022 these plans were briefed out months in advance, and significant tax hikes were also announced alongside the plans, making it the biggest tax-and-borrow Budget in about 30 years.

The tax increases – while very painful almost immediately in political terms – bought the government a little more time, as markets watched to see what the forthcoming ‘growth’ measures would be, and to see whether the government was going to get serious about finding savings and slashing waste in the upcoming Spending Review.

The time Labour bought came at a very high price, and it didn’t last long. Time seems to have run out. Borrowing costs were drifting up as early as September last year (when details of the Budget were first coming to light). Then costs rose again after the Budget announcement. Now costs have surpassed where they were at the peak of Truss’s mini-Budget fallout.

So the circumstances were different, but the underlying cause of rising borrowing costs is largely the same. Neither party really ‘crashed the economy’ (though Labour could be facing other accusations on that front in the future, if the economy continues to shrink). The fatal error, for both Reeves and Truss, was making the assumption that markets would see their long-term strategy, understand the need for investment, and be willing to ‘finance the transition’. In both cases, this turned out to be a grave misreading of how the markets would interpret their Budgets.

The negative market reactions aren’t shocking. In Truss’s case, she wanted to borrow tens of billions of pounds for a day-to-day subsidy, effectively asking the markets to enable her plans for price controls. Unsurprisingly, this was not viewed as a credible growth strategy. Reeves’s sell – that a boost in infrastructure spending will lead to a booming economy – has also failed to work. While there is now a broad consensus across parties that capital spending should be prioritised, markets have clearly rejected the idea that this is some kind of silver bullet – not least when questions about the UK’s most expensive institutions (the NHS, the state pension) remain completely unreformed and untouched.

There is another similarity to note: the Sunday mornings after the Budgets. In 2022, then-Chancellor Kwasi Kwarteng took part in the media round, announcing on the Sunday programmes that the mini-Budget was only the beginning. These comments saw borrowing costs surge the following day. While Reeves’s comments on her own post-Budget media round were a little more subdued, she also made a very bold claim, telling Sky News that ‘there is no need to come back with another Budget like this’ and that ‘we don’t need to increase taxes further’.

We asked on Coffee House at the time how markets would respond to those comments – not least because of the multi-billion black hole estimated to be left in the public finances post-Budget. It seems we are slowly but surely getting an answer.

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