Rachel Reeves’ position as Chancellor is growing increasingly precarious. She fought the 2024 general election on a platform defined by strict fiscal rules, a refusal to raise income taxes, and a pledge to deliver economic growth. It was a politically calculated stance—economically incoherent, but designed to appeal to Conservative-leaning voters whose support Labour believed it needed to secure victory.

In the end, those Conservative voters largely stayed home. Labour won a landslide parliamentary majority, not by expanding its base, but because the Conservatives collapsed. Reeves’ fiscal caution may have soothed middle-class nerves, but it did little to inspire enthusiasm. And now, the implications of that platform are becoming painfully clear.

With Reeves still committed to her fiscal rules and tax pledges, the UK is heading toward yet another round of austerity—this time under a Labour government. If she holds the line, the public sector will remain underfunded, investment will be stifled, and the economic recovery Labour promised will stall. The political cost could be devastating. Labour won this time by default; it will not be so lucky at the next election if it fails to deliver tangible improvements. A U-turn in economic policy is not optional—it is necessary for survival. And if Reeves cannot lead that shift, she may have to go.

At the heart of Reeves’ platform is a misplaced obsession with fiscal discipline. Her self-imposed rules—to reduce debt as a share of GDP and to match current spending with tax revenues—are meant to signal economic competence. But they rest on a fundamental misunderstanding of how public finance works in a sovereign currency economy.

Governments are not households. Households must live within their means because they can’t create money. The UK government, by contrast, issues its own currency. It can never run out of pounds. The real limit on government spending is not the balance sheet but the availability of real resources—labour, energy, infrastructure—and the risk of inflation if demand outstrips supply.

So long as there is unemployment, unused capacity, and unmet social needs, the government can and should spend to mobilise those resources. Whether this results in a deficit or increases the debt-to-GDP ratio is economically secondary. What matters is whether policy is delivering full employment, low inflation, and rising living standards.  

Reeves’ rules ignore this. They prioritise fiscal metrics over economic outcomes. The result is a rigid framework that will constrain public investment precisely when it is most needed—whether in health, education, housing, or climate infrastructure. Labour cannot meet its promises within these limits.  It cannot deliver its own policies, eg, increasing training for the existing population to reduce the need for immigration, because it is not funding them adequately.

Eventually, the contradiction will become untenable. The growing gap between public need and self-imposed fiscal constraint will force a reckoning. Either Labour breaks its rules or fails to govern effectively. The longer the government delays that decision, the higher the political cost.

The rules may have been a useful pre-election posture, but in government they are a trap. They create the illusion of responsibility while setting the stage for policy failure. What’s needed is not fiscal virtue-signalling, but a pragmatic approach that uses the power of the public purse to deliver real change.

A government that understands monetary sovereignty can invest without fear of arbitrary debt targets. Taxes should be used to manage inflation and inequality, not to “fund” spending. What matters is not whether the budget is balanced, but whether the country is.

In this light, Reeves’ fiscal rules are not a sign of seriousness—they are a liability. If Labour is to govern successfully and win a second term, it must abandon these illusions and embrace a more functional understanding of public finance. A U-turn is coming. The only question is whether Reeves will lead it—or be replaced by someone who will.