Rachel Reeves is Making the Same Mistake as Liz Truss

Labour loves to remind voters how Liz Truss ‘crashed the economy’, but Rachel Reeves is making the exact same mistake. She’s asking the markets to lend the Government vast sums and they’re telling her where to get off, says Kate Andrews in the Spectator. Here’s an excerpt.

The last week has shown that there doesn’t have to be any kind of grand plot against a politician for the markets to take a disliking to the Government’s economic agenda. Their verdict isn’t some ideological rebuke or criticism of any particular philosophy. Rather, it’s an indication that the numbers in your Budget aren’t adding up. If anything, this latest crisis mirrors the 2022 crisis more than either Truss or Reeves would like to admit. In both cases, they insisted that their plans to borrow and spend were responsible. In both cases, markets decided they were not.

Re-reading analysis from the time in question is probably a better way of walking down memory lane. But it’s worth reminding ourselves of the key differences between 2022 and the start of 2025. These are not identical situations.

Truss’s decision to cut out practically every branch and institution in Government from knowing the details of her mini-Budget meant that the response to it was far more explosive (many members of her senior team in No. 10 didn’t know what was coming). Markets were mainly reacting to Truss’s request to borrow roughly £100 billion in one year to subsidise all household energy costs – just as borrowing was becoming much more expensive. Interest rates were rising around the world in response to the inflation crisis.

Markets decided this was an expensive bet, and borrowing costs surged. …

Reeves also opted for significant borrowing, asking for £140 billion more over the next five years, with spending increases front-loaded into the first two years of Government. A staggering figure, even bigger than Truss’s request. But unlike 2022 these plans were briefed out months in advance, and significant tax hikes were also announced alongside the plans, making it the biggest tax-and-borrow Budget in about 30 years.

The tax increases – while very painful almost immediately in political terms – bought the Government a little more time, as markets watched to see what the forthcoming ‘growth’ measures would be, and to see whether the Government was going to get serious about finding savings and slashing waste in the upcoming Spending Review.

The time Labour bought came at a very high price, and it didn’t last long. Time seems to have run out. Borrowing costs were drifting up as early as September last year (when details of the Budget were first coming to light). Then costs rose again after the Budget announcement. Now costs have surpassed where they were at the peak of Truss’s mini-Budget fallout.

So the circumstances were different, but the underlying cause of rising borrowing costs is largely the same. Neither party really ‘crashed the economy’ (though Labour could be facing other accusations on that front in the future, if the economy continues to shrink). The fatal error, for both Reeves and Truss, was making the assumption that markets would see their long-term strategy, understand the need for investment, and be willing to ‘finance the transition’. In both cases, this turned out to be a grave misreading of how the markets would interpret their Budgets.

Worth reading in full.