Chancellor’s Dilemma: Balancing Fiscal Rules, Global Instability, and Political Pressure

Following last year’s general election victory, the Chancellor announced her new fiscal rules. Rules not dissimilar to those set by her predecessor but rules that would leave less fiscal headroom than most other Chancellors have had to contend with. This of course was months ahead of Donald Trump’s election victory and his subsequent ‘Liberation Day’, but it was already against a backdrop of global instability. With continuing wars in Ukraine and the Middle East this was a high stakes move.

In Westminster, the Chancellor and Prime Minister will have a lot to contend with while navigating the new situation in which they find themselves. There will be growing discontent among backbench Labour MPs, what ever the Chancellor decides to do next. Large sections of the Parliamentary Labour Party will be furious if the Online Safety Act is watered down to placate US tech giants, and the suggested scrapping of the Digital Services Tax, could mean losses for the chancellor of around £800m a year.

With so little wiggle room, Rachel Reeves options are increasingly limited. It’s looking unlikely the Chancellor will break with her own rules, so how does she manage both Trump and her backbenches?  How does she avoid breaking her promise to not increase taxes on ‘working people’ and how does she boost infrastructure spending while business is stifled by the increased tax levied against them in her first budget?

The Trump Administration is said to have raised the UK’s Food Standards as an issue in discussions and thankfully the Government appears to have ruled out watering down any of our standards. This would not only have been an issue for trading with the EU, but a serious issue for her backbenches too. However, suggestions the UK could lower tariffs placed on some US agricultural produce will not please already stretched and frustrated UK farmers, many of whom are now constituents of new Labour MPs with smaller majorities.

With car manufacturers and steel hit hard by US tariffs, this week the government is also likely to step in and help the steel industry in Scunthorpe, most likely through nationalising the plant. And at an unknown cost to the Chancellor, this week she took to Jaguar Land Rover in the West Midlands, to reassure the sector that help is on the way. It’s hard to know what meaningful support would be, short of reversing the tariff completely.

The West Midlands accounts for around 30% of all automotive employment in the UK. Whether it’s producing the cars, or the components, businesses in the region will be hit hard if the Government doesn’t find a solution. Labour MPs locally will be making this case to Government.

All in all, the Chancellor must feel like she is in an impossible situation. But as she sets her own fiscal rules, it’s a situation of her own making.

If you would like to discuss this further, please contact Nicola Richards