Rachel Reeves and Keir Starmer now own Britain’s economic mess

UK Chancellor of the Exchequer Rachel Reeves will be asked to break her usual script and demonstrate some surety of touch in reassuring the markets. AP

On the cusp of a golden era of AI innovation across the economy and the state, the UK government instead finds itself braced to keep a financial crisis at bay. It has only itself to blame for the fallout from the neophyte manner in which it took control of the G7 economy last year.

Rachel Reeves was cued up as the “Iron Chancellor of the Exchequer” as she stepped in as the first woman to run the UK Treasury in its 900-year history. Ms Reeves returned from China on Monday after pursuing important business that should open up longer-term channels of growth, but with little to offer for her immediate problems.

The mighty dollar is on a roll ahead of US president-elect Donald Trump’s inauguration next week. It has gained 10 pence on the UK pound since the US election on November 5, as the sterling dropped to $1.21 on Monday.

Ms Reeves appears to be in trouble, as the slide in the value of the pound has fed off a bond market wobble on her public spending plans. This has increased the government’s expenses to service the long-term debt and wiped out her claims to have a short-run cushion for expenditures.

This uncomfortable pinch-point means that answers are being demanded from Ms Reeves (and her boss, Prime Minister Keir Starmer) about what their vision for the economy is. Over the next few weeks, Ms Reeves will be asked to break her usual script and demonstrate some surety of touch in reassuring the markets. Otherwise, there could be a spiral.

The government’s credibility issue stems from the fact that Mr Starmer and Ms Reeves have been presented as a double act. In lockstep they pledged to deliver the highest growth, in gross domestic product terms, among G7 member nations. Instead, they are hobbled by the flat economy left by the Conservatives and the highest inflation in the G7.

Mr Starmer was on the stump at the weekend promising to inject AI into the UK’s veins, recognising the rapid pace with which the technology is advancing. The problem with this, as well as Ms Reeves’s discussions on financial services in China over the weekend, is that promises on the horizon are unlikely to move the needle for the first months of the new year.

That is where the Labour party has been found lacking on how to manage the British economy.

After winning big in the general election in July, Ms Reeves and Mr Starmer embarked on a political exercise to turn the page on the Conservative government’s mismanagement of the economy. They proclaimed a black hole in the public finances that ranged from £20 billion to £40 billion ($24.2 billion to $48.5 billion).

They repeatedly threw this attack line at the Tories, but what that did was break the public’s – and the market’s – confidence in the British economy. And by running with this strategy, Ms Reeves also failed to recognise that from July she owned the prospects of the national economy. The Conservatives were a dead letter in economic terms, blown away backwards in the wind. In the process, Ms Reeves starved the confidence of the very growth engine that she needed to cajole into higher gears.

The events of the past few months have been a textbook example of how political leadership can affect national economic performance. In a budget that sought to repair the lack of funds with the raising of extra taxes, Ms Reeves increased the payroll tax. But if the logic of a rapid AI switchover was real, surely taking more from employers for hiring staff was an ill-timed move given how that would lead to job cuts.

Rupert Soames of the Confederation of British Industry on Monday bluntly told Ms Reeves that she had fallen foul of the adage: “If you are in a hole stop digging.” Another big name in business, Manchester United shareholder Jim Ratcliffe, accused Ms Reeves of presiding over the de-industrialisation of the UK. His chemical plant in Scotland is closing this summer, having had the life squeezed out of it by “high energy prices and carbon taxes”.

Confidence in the UK economy barely exists, and Ms Reeves’s problem is partly that she oversold her own skills as a manager of the economic brief.

Still to come is Mr Trump’s inauguration and the subsequent delivery of his economic agenda, which would almost certainly include tariffs. There is also the overshoot in UK welfare and healthcare budgets that presents Ms Reeves with politically impossible choices. The government has a large majority, but few Labour MPs will be mentally equipped to stand over hard cuts designed to keep the budget on track for the markets.

On the sidelines of an investment conference that the UK government held before its tax-raising budget, one money manager told me that the government had the goodwill to increase spending by tens of billions of pounds. The caveat was that this increase in spending needed to be structured like an international investment package and made separate from extra day-to-day spending. Instead, Ms Reeves shovelled money into reforms of the existing services, plus additional wages for state workers. There was no nitty-gritty framework that tied more money to extra growth.

The time to get ahead of the markets was October, but instead there have been three months of increasing negativity. And as the global economy pivots to the strengthening dollar, Ms Reeves faces a very rough 2025.