The problem that Reeves had to deal with in her November 2025 budget was how to reverse the increasing likelihood of Reform becoming the largest party in the 2029 general election.  On this measure the budget will most likely be a failure. 

While we can all feel a sense of relief that she has, under pressure from her alarmed backbenchers, abandoned her previous drift towards renewed austerity, this budget ultimately relies on the private sector to achieve the increase in the standard of living which would allow Labour to win the next general election.  We doubt that reliance on the private sector is justified.

With her continued advocacy of moribund fiscal rules, Reeves has become a millstone round the neck of the Labour party.  Labour’s fiscal rules, if it chooses to have some, should be that the government will spend when such spending improves the lives of UK citizens, the government will tax when such taxation improves the lives of UK citizens and the government will issue bonds when doing so improves the lives of UK citizens. 

These spending and taxing decisions will lead to changes in various statistics like the amount of national debt and the ratio of debt to GDP.  But these statistics should be seen as the outcome of good fiscal decisions and not the fiscal target.  Little attention should be paid to them.  Instead, for Reeves, the statistics have become the objective of fiscal policy.  Good fiscal decisions that will improve the lives of UK citizens are not allowed if they endanger the statistics that Reeves has set out to achieve.

A good example of this is the policy of cutting the 2 child benefit cap.  Clearly getting rid of that cap would have given poorer families more much needed money.  They would have spent it largely on food and clothing.  Thus generating demand in the British economy which would have helped reduce the growing level of unemployment.  But in 2024 Reeves could would not allow the cap to be ended because it would have interfered with her fiscal targets.  In 2025 she ended the cap under strong pressure from her anxious back benchers.

Sensible fiscal policy in the UK requires understanding three basic facts.

First, the UK is a currency-creating state. It issues the currency it spends. While this does not mean the government should spend without limit, it can always finance what Parliament chooses to undertake. The real constraint is inflation: the government should avoid spending that competes with the private sector for scarce resources and drives up prices.

Secondly, because the state cannot run out of its own currency, the purpose of taxation is not to raise money but to free up real resources. The right question about any tax is not how much revenue it will generate but how it will reduce private-sector demand for resources the government needs. If resources are idle, the government can simply create the money to buy them. If they are already in use, the government could technically outbid the private sector—but doing so would be inflationary, so taxation should be a tool to free up those resources.  

Consider the tax on private schools introduced in 2024.  The main purpose of the tax was to improve education in state schools, although ‘fairness’ arguments were also put.  It was expected that some private sector teachers would be made redundant and available for hire by the state sector.  There was a certain logic in that argument.  However, in practice, the tax has had a minimal effect on moving teachers from the private sector to the state sector. 

Consider the increase in employers’ National Insurance.  There is evidence that it has led to an increase in unemployment particularly in the hospitality sector.  Is the private sector keen to hire these newly unemployed?  It seems not.  Has Reeves any plan to retrain them to do work that she considers will better meet society’s needs like building social housing?  It seems not.  She is focussed only on reducing the deficit.  She is prepared to see unemployment rise so that she can hit her financial targets.  Compare that with Keynes’ view that it was better to print money and pay people to dig holes and fill them in again than leave them unemployed.

Thirdly, the state should issue bonds when it wishes to provide the private sector with a risk-free interest-bearing asset.  The practice of auctioning bonds was introduced in 1985 as a political device to suggest that the state was dependent on the private sector if it wanted to spend more than it raised in revenues.  Bonds should be issued on tap as they were before 1985.  If the private sector chooses not to buy them, the debt should be left with the BoE.

All this was widely understood from 1940 to 1975, when Keynesian economics dominated policy.  In 1943, Keynes most competent disciple, Abba Lerner, wrote: “The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound. “

There is no sign that Reeves understands these principles. She repeatedly claims her economic instincts were formed helping her mother manage the household budget at the kitchen table. Yet her mother was a currency user, while the UK government is a currency creator. The Tories are delighted that she is so economically illiterate.  They will constantly remind her of her demons. 

With Reeves as chancellor, this Labour government is unlikely to have a significant impact on the economy.  Backbench unrest will continue to grow. It is difficult to imagine that there will not be attempts to replace her. But Reeves and Starmer present themselves as a pair, and it is likely they will fall together.

Who might replace them is far from clear. Andy Burnham and Wes Streeting are often mentioned, and both possess a certain amount of charisma. But neither has challenged Reeves’ fundamental mistake of treating fiscal statistics—such as the debt-to-GDP ratio—as the goal of policy rather than the by-product of good decisions. Labour needs a chancellor willing to say: I will spend when it benefits UK citizens and tax when it benefits UK citizens, and I will not allow arbitrary fiscal statistics to stand in the way.

It is not evident that there is any such person in the Labour ranks.