Ever since a functionary known as “Henry the Treasurer” oversaw the spending of William the Conqueror over 900 years ago, the nation’s finances have been controlled exclusively by men.
On July 5, Rachel Reeves walked into the UK Treasury as the first woman ever to take hold of the country’s purse strings. Officials crowded at windows on every floor of the hulking Edwardian building to take a look at the new chancellor. “It’s a massive moment,” says one Treasury official.
A sense of history hung over Reeves as she addressed staff on her first day in the job. “To every young woman and girl watching — let today show there should be no ceilings on your ambitions,” the new chancellor said. One female Treasury staffer says: “It was a really emotional moment. It felt more exciting than simply being a change of government.”
A female City executive, who knows Reeves well, says: “Rachel carries a lot of weight by being the first woman in the job. She doesn’t want to let people down.” But by Reeves’s own estimation, the scale of the task confronting her is also historic and the route ahead is daunting.
The 45-year-old economist has been central to Sir Keir Starmer’s project to turn the Labour party from a political basket case into the party of government. Reeves, who set Labour on a pro-business path based on promises of “stability” and fiscal discipline, claims she faces “the worst set of circumstances since the second world war.”
Indeed, Britain’s economic woes are plain to see. The UK has been mired in low growth since the global financial crisis, with taxes at a 70-year high, public debt at more than 91 per cent of GDP and public services — notably the National Health Service and prisons — at crisis point.
Former Tory chancellor Lord Ken Clarke says that no incoming chancellor has faced a more challenging task since Margaret Thatcher’s finance minister Sir Geoffrey Howe arrived in 11 Downing Street in 1979 with the economy on its knees.
Previous Labour chancellors have been more fortunate. Clarke in 1997 bequeathed Gordon Brown an economy that went on to grow at 4 per cent that year, with low inflation. It is possible that Reeves also gets lucky, a key requirement for any chancellor. A hint of promise came with new data on Thursday showing the British economy grew at 0.4 per cent in May — twice market expectations — after flatlining in April.
But what happens if Reeves’s promise of sustained stronger growth fails to materialise, let alone any time soon? Tax rises, further pressure on fraying public services and new strains on the country’s public finances could soon dent the enthusiasm that greeted the state-educated chess prodigy on her first day in the job.
For all the goodwill, Clarke states the bottom line: “She will be judged on results.”
Reeves was born in south-east London in February 1979 at the tail-end of the “Winter of Discontent”. The wave of strikes ushered in 18 years of Tory rule which spanned her entire childhood.
The daughter of two teachers, Reeves attended a local girls’ comprehensive school. She excelled academically, as well as at chess, but the school was dilapidated, with lessons taught in pre-fab huts. The experience stayed with her; by the age of 17, she had joined the Labour party.
After studying at Oxford university and the LSE, she became an economist at the Bank of England, a part of her CV that she frequently deployed in opposition to reassure voters she was serious about public finances.
“She was basically completely orthodox on the economy,” recalls one BoE colleague from her early days. “She’s totally fiscally conservative.”
Reeves became MP for Leeds West in 2010 and had a swift rise through the Labour opposition ranks until the election of the far-left Jeremy Corbyn as party leader in 2015. Unlike Starmer, who served in Corbyn’s shadow cabinet, Reeves refused to have anything to do with him, exposing herself to intense political pressure from leftwing activists who viewed her as a class traitor.
Some Labour MPs regard this period as evidence of Reeves’s inner toughness. “It was incredibly difficult,” says one colleague. “She was under a huge amount of pressure and had to spend a lot of her time fending off the Corbyn army in her local party.”
During the Corbyn years, Reeves was elected by fellow MPs to chair the Commons business committee, carving out a position as a critic of bad corporate practice but essentially pro-business. “She was tough on business at times but she didn’t see the City and business as ‘the problem’ — she saw them as enablers of UK plc,” says Chuka Umunna, a former shadow cabinet colleague.
Reeves wrote a pamphlet in 2018 on the “Everyday Economy” advocating higher taxes on the wealthy, including levies on capital gains and inheritance — policies which the Conservatives believe she will end up implementing, in spite of her insisting she has “no plans” to do so.
“I’ve changed my mind,” Reeves told the FT last month. “I don’t believe that fiddling around with tax rates is the best way to grow the economy.”
Starmer succeeded Corbyn as Labour leader in 2020 and a year later he brought in Reeves as his shadow chancellor. At the time, Labour was being crushed in the polls by Boris Johnson’s Conservatives; party insiders say Reeves was pivotal in turning things around.
“From the moment she was appointed she sent a signal that if you want public trust, trust on the economy is non-negotiable,” says chancellor of the Duchy of Lancaster Pat McFadden, now one of a “quad” of ministers — alongside Starmer, Reeves and deputy prime minister Angela Rayner — who will run the new government.
McFadden says that stripping out unaffordable spending commitments, including a £28bn “green prosperity” plan, was key to winning the election. “That wasn’t an easy thing to do,” he says, referring to widespread criticism of Reeves and Starmer from the party’s powerful environmental lobby for scaling it back.
Reeves spent the years before the July 4 election schmoozing the City and now has a coterie of informal big name advisers including Mark Carney, former governor of the BoE, Sir John Kingman, chair of Legal & General, and Baroness Shriti Vadera, chair of Prudential. “She has the trust of the City,” says one FTSE 100 executive, adding that the City wanted to see results.
Despite her background, Reeves is now firmly rooted in Britain’s economic establishment. “Being chancellor is what she always wanted to do,” says one close colleague. “It’s like she has come home.”
Reeves’s arrival at 1 Horse Guards Road has not only excited Treasury staff because of the fact they have their first female boss.
They believe the department now has a clear sense of direction, after a chaotic post-Brexit era which saw six Tory chancellors in eight years. The new chancellor says it will be the “most pro-growth Treasury” in history with a mandate to bulldoze its way through vested interests.
One of Reeves’s first acts will be to axe tax breaks given to independent schools. Providing routes to the top for poorer kids is a big part of the political DNA of Reeves and indeed Starmer’s new cabinet. Out of 25 cabinet members, a record 24 went to state schools.
Starmer, whose background is in law not economics, trusts Reeves implicitly. For now at least she holds great sway across a whole swath of government activity. It was instructive that Reeves announced reforms to Britain’s sclerotic planning system, even though that policy lies within Rayner’s policy area.
Her agenda rests on boosting growth. Without it, she faces a choice between squeezing public services — Starmer has promised “no return to austerity” — putting up taxes or rewriting the government’s borrowing rules. Reeves says she does not want to do any of those things, but some fear that stronger growth — if it arrives — will not come soon enough.
“The state of the public realm is such that they will have to spend some money — and they need to spend it now,” says one City grandee, arguing that Reeves needs a more ambitious growth agenda. “They have a big agenda on planning, but do they have anything else? What is their agenda on infrastructure, Brexit, skills, migration, higher education?”
Reeves has announced plans for investment in the green transition — for example £7.3bn spread over a parliament in a National Wealth Fund — but it pales into insignificance compared with the Biden administration’s $369bn green subsidy plan. Critics have described Reeves’s approach as Bidenomics without the money.
Reeves has also attempted to attract investment by proclaiming Britain to be a “safe haven” in a world beset by political uncertainty. One FTSE 100 boss says this could work: “International investors do see that the UK is under new management and the rest of the world is a bit of a mess. They may help to fill some of the hole, but not all of it. It’s a big hole.”
She is planning to create a new council of economic advisers in the Treasury, chaired by London School of Economics academic John Van Reenen, to advise her on how to drive up growth, according to people familiar with the matter.
Some analysts fear that Reeves’s growth ambitions will quickly clash with economic reality. Output per hour worked, a key gauge of the country’s ability to lift living standards, grew a mere 0.1 per cent in the first quarter, compared with a year earlier.
Meanwhile, the UK has been squatting at the bottom of the G7 rankings in terms of total investment as a share of GDP for much of the past three decades. Turning that around is an uncertain project that will take time.
The problem is that the Office for Budget Responsibility, the country’s fiscal watchdog, is already widely seen as overly bullish about the UK’s growth prospects. Its year-on-year growth projections for later in the parliament are stronger than those of the IMF, for example.
The estimates for potential growth that underpin the OBR’s forecasts are also notably more optimistic than many other forecasters, at 1.6 per cent by the end of the forecast period. Peder Beck-Friis, economist at bond fund manager Pimco, said a trend rate of 1 to 1.25 per cent would in his view be more realistic.
“Fiscal policy in the UK will be fairly orthodox and tight in the coming years — partly reflecting the limited fiscal space,” he predicts. “That is a constraint that will limit any measures the government will announce.”
This raises the unappetising prospect that instead of rewarding the new government with upgraded potential growth forecasts when Reeves presents her first budget, the OBR could instead either leave them little changed or even trim them back.
Shifts in the OBR’s productivity estimates — a key driver of trend growth — are enormously consequential. A 0.5 percentage point upward or downward shift in the OBR’s productivity growth forecasts can add or subtract upwards of £40bn in borrowing, the office says.
“You have inherited a set of forecasts where the OBR is more optimistic than most, and you need things to be even better to improve the fiscal situation,” says Carl Emmerson of the Institute for Fiscal Studies.
Reeves, Emmerson went on, might get lucky, but she is not going to get lucky as soon as this autumn’s Budget, he predicts. “I’m not sure what policies between now and then would convince the OBR that they should be revising their forecasts up even more,” he says.
The task ahead of Reeves this autumn is not just economic, but political. This is why, between sunny bursts of rhetoric about turbocharging the economy, she and her colleagues are emphasising just how grim the inheritance from the Tories is.
That has entailed ministers describing the poor state of public services, including the “broken” NHS, in early commentary. Reeves has also commissioned an urgent “assessment of the state of our spending inheritance”, supposedly to get a sense of the scale of the challenge that lies ahead. Conservatives say this is “rubbish”, that all the facts are in the public domain, and that Reeves is softening up the public for tax rises.
It will certainly provide the framing for some decidedly tough decisions in her first budget, says James Smith of the Resolution Foundation, an independent think-tank. “They will say the public finances are in a much worse state than we imagined,” he says. “That line will be coming out a lot — so prepare yourself.”
He sees an argument for Labour to follow that document with an initial one-year Whitehall spending settlement that will entail a tough outlook for government departments, as the party points to the invidious fiscal legacy it has been left by the Tories.
Reeves could then wait another year before setting out a longer-term departmental spending review in 2025, he says, hoping that stronger growth and lower interest rates will by then come to the rescue, enabling “less harsh trade-offs”.
Making the fiscal task at hand even more difficult is the decision by Starmer and Reeves to be unusually emphatic and specific in ruling out a host of tax increases affecting around three-quarters of government revenues, including key personal and business taxes.
Rupert Harrison, adviser to former chancellor George Osborne, says he has been surprised by the clarity of the Labour tax pledges. He says Labour has left itself enough rhetorical wriggle room to extend a freeze on key tax thresholds by a year, allowing it to raise some much-needed revenue. He says higher taxes on capital and wealth may well lie ahead.
“The biggest problem Rachel Reeves faces is she is a Labour chancellor who has raised very high expectations on public spending and public services but has boxed herself in incredibly tightly on what she can actually do about it,” Harrison says.
“She has placed enormous faith in the idea of magically raising the growth rate. The chances of squaring the circle are extremely low and it will largely come down to luck.”
After years of economic stagnation, Britain will be hoping Reeves gets lucky. The chancellor with the deadly serious public persona and raucous laugh in private has arrived at the Treasury with an unusual degree of cross-party goodwill.
On election night Jeremy Hunt, her predecessor, called Reeves and Starmer “decent people and committed public servants”. Ken Clarke describes her as a “responsible, sensible woman. She will genuinely do what she believes to be in the national interest.”
Vadera, the former Labour business minister turned banker, is pleased by what she has seen so far. “They do say if you want something difficult done, ask a woman. She’s shown in opposition and in her first days that she has the kind of strength and sense of purpose she will need to meet the tricky challenges ahead.”
This article was written by Sam Fleming, George Parker and Jennifer Williams from The Financial Times and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
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