Is Rachel Reeves heading for her own black Wednesday moment?
If the OBR downgrades growth forecasts and the Chancellor breaks one of her own fiscal rules, it could be the beginning of the end for Rachel Reeves just as Black Wednesday was for Norman Lamont and the Major government, says Malcom Gooderham
Within months of winning the 1992 general election John Major’s administration suffered a fatal blow to its economic credibility, when Sterling was forced to withdraw from the European Exchange Rate Mechanism (ERM), crashing the pound and triggering a recession. It was dubbed ‘black Wednesday’ by some, ‘white Wednesday’ by others. The then Chancellor, Norman Lamont, delivered the next Budget but was out of office within a year. Is Rachel Reeves facing an ERM moment of her own?
On entering office Reeves told the country she had a plan to deliver additional growth, lower prices, raise living standards and preside over a period of policy stability. However, after her first Budget each claim is looking hollow.
The OBR is preparing an Economic and Fiscal Outlook (EFO) for March. Were it to follow the Bank and downgrade growth, this could be the catalyst to collapse economic confidence in Labour which the Party may struggle to regain before the next general election – no matter when it is called.
Keir Starmer will not remove Reeves before the Spring Statement. We can expect her to come out fighting on 26 March and make a virtue out of taking ‘tough’ spending decisions to ensure that the new fiscal rules are being upheld. Tax changes may also be required. Having told Parliament that she would not be coming back for more tax, this would further stretch her economic and political credibility. However, a failure to meet, or worse, change her own “non-negotiable” rules, would be even more symbolic of policy failure.
This policy predicament points to the intellectual fallacy in the current fiscal architecture and the strategic, not tactical nature of the policy challenge
Equally, the OBR is in an awkward place. Their growth forecast for 2025 at two per cent remains an outlier. To leave it unadjusted risks eroding confidence in their own credibility. Delivering a downgrade will have a similar impact for this Chancellor. They could upgrade their numbers for future years and generate some political and fiscal ‘headroom’, but such a move risks rebounding on them and the government.
More significantly, this policy predicament points to the intellectual fallacy in the current fiscal architecture and the strategic, not tactical nature of the policy challenge. While Reeves latest policy pivot on planning and infrastructure may have changed the narrative for a week, it will not change the economic – and political – fundamentals for this parliament. So Starmer and his Chancellor face ‘Groundhog day’ at every fiscal event until they revisit their approach. Which means the destabilising policy speculation from year one could become a feature of this administration.
No easy options
There are no easy options. Especially for a left-of-centre government that has ruled out radical spending reforms and restraint and promised no return to what they regard as ‘austerity’ budgeting; alongside manifesto commitments and subsequent claims not to raise taxation.
If this Chancellor proposes lower spending, such savings via welfare reform will probably be forecast for the back end of the parliament. Which will spur suspicion about two things: first, the integrity of the claims and the sustainability debt; second, the next general election being held before the fiscal year 2028/29.
Either way, if Rachel Reeves misses both a fiscal target and the OBR downgrades growth, it could be regarded as a defining and seminal moment for the Starmer government and mark the beginning of the end for Reeves’ tenure at No.11.
Her predecessor, Norman Lamont, when delivering his resignation speech in the House of Commons, famously lambasted John Major for being “in office but not in power”. Critics may yet level that charge at Starmer, unless he imposes some discipline and delivers on the bold pledges his Chancellor made on behalf of the Labour party.
Malcolm Gooderham is senior partner at Elgin Advisory