Fri, 31 Jan 2025

Faisal Islam: The 'Iron Chancellor' will have to flex to get the growth she wants

In choppy global seas, going for growth will require tricky navigation
UK Chancellor Rachel Reeves' plan to boost economic growth has been put to the test this month, with global market turmoil and rising borrowing costs posing challenges to her "iron" fiscal discipline. Reeves had pledged to reduce public debt as a share of national income by the end of this Parliament, but the recent bond market volatility forced the government to reassure markets that it would stick to its spending rules. Despite the short-term jitters, long-term government borrowing costs have since fallen. The Chancellor has responded to the crisis with a series of pro-growth measures, including plans for a new Heathrow runway, easier visa regulations for AI and life science professionals, and a relaxation of non-domicile tax benefits. However, these announcements come without specific funding commitments, leaving some questioning whether Reeves is willing to take significant economic risks. Critics argue that the Chancellor's focus on supply-side growth, particularly through infrastructure projects, may not be enough to offset the impact of significant tax rises, including a hike in national insurance payments and a higher minimum wage. These measures could lead to higher inflation and unemployment rates. Reeves faces several challenges as she navigates the complexities of global trade, including potential tariffs with the US and EU, as well as diplomatic efforts to secure agreements on issues like Brexit reset and pharma industry regulations. The Chancellor's commitment to stability may be tested by her pro-growth agenda, particularly in the face of rising tensions between major economic powers. The article concludes that Reeves' decision-making will be guided by her desire for growth, but warns that this approach requires delicate diplomacy and careful navigation of complex global relationships.
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