Reeves Defends Fiscal Conservatism as UK Growth Slows

Chancellor of the Exchequer Rachel Reeves is facing mounting pressure to loosen the purse strings as the UK economy confronts headwinds from a global trade war and faces revised-down growth forecasts. However, in a recent interview with Bloomberg, Reeves staunchly defended her commitment to fiscal responsibility, arguing that it's necessary to provide stability in an increasingly uncertain world.

The defense comes as the Organisation for Economic Co-operation and Development (OECD) slashed its growth projections for the UK economy, with the forecast for annual growth in 2025 dropping by 0.3 percentage points to 1.4%. The OECD pointed to trade tensions fueled by US President Donald Trump's tariffs as a key factor weighing on global growth.

When asked about the OECD's downgrade, Reeves acknowledged the challenges but stood firm on her fiscal approach. "Well, of course, there are costs from any measures on tax. But there are also costs of irresponsibility," she told Bloomberg. "And if in the budget last year I hadn’t have dealt with the £22 billion pound black hole that I’d inherited from the Conservatives... then we wouldn’t have been able to increase defense spending in the way that we did."

Reeves' remarks highlight the central tension in her economic strategy: balancing the need to stimulate growth with the imperative to maintain fiscal discipline and reduce government debt. She argues that the measures taken in her October budget, including tax rises and spending cuts, were essential to stabilize the economy and allow for targeted investments in areas like defense.

Recent economic data further complicates Reeves' task. While the UK economy managed to avoid a recession last year, January's unexpected contraction of 0.1% underscored the fragility of the recovery. "The world has changed and across the globe we are feeling the consequences," Reeves stated in response to the disappointing GDP figures.

That decline puts her back in the red as a British think tank recently estimates that Reeves is £4.4 billion in the red on fiscal rules, requiring tough measures to get her back on track. To address that, Reeves is trying to meet her target of having current spending paid for from tax receipts, without raising taxes further which she left herself a historically slim £9.8 billion of headroom against that in her budget in October, a margin which has since been wiped out by higher borrowing costs and stagnant growth.

One of the key planks of Reeves' plan is to reduce the regulatory burden on businesses. She has announced a target to cut the administrative burden by 25% during the course of this Parliament and has highlighted measures such as abolishing NHS England and streamlining environmental regulations.

However, some economists question whether Reeves' fiscal caution is hindering growth. While the OECD forecasts the UK to be the second-fastest-growing economy in the G7 this year, the organization itself revised down its projections.

Reeves' commitment to fiscal rules may also limit her ability to respond to unexpected economic shocks. "Isn’t it the job of a responsible chancellor to build an adequate safety cushion into the public finances?" the Bloomberg interviewer asked, prompting Reeves to defend her approach and argue that she had increased fiscal headroom in the October budget.

The debate over Reeves' fiscal policy is set to intensify in the coming weeks as she prepares to deliver her Spring Statement on March 26th. The statement is expected to include further details on her plans for welfare reform and spending cuts, which are likely to face significant opposition from within her own party and from advocacy groups.

Even economists like former Bank of England deputy governor Charlie Bean have questioned the wisdom of prioritizing distant fiscal targets over immediate needs. The Spring Statement will reveal whether Reeves will heed these calls for a more flexible approach or stick to her fiscally conservative guns.

For now, Reeves remains steadfast in her tone. "When we're spending a hundred billion pounds a year on servicing government debt," she said, "I don’t think anyone can seriously argue that we don’t need to get a grip of government borrowing and government debt."