Chancellor Rachel Reeves’ prestige in tatters as she prepares to ditch her strict ‘fiscal rules’ designed to safeguard Labour’s economic credibility

Rachel Reeves is preparing to ditch her strict fiscal rules that were meant to safeguard the Government’s economic credibility, senior Labour sources have warned.

In an attempt to avoid a Liz Truss-style market meltdown, the Chancellor promised at the outset of the Labour Government last year that public finances would be in balance or surplus by 2030, with day-to-day spending paid for out of taxation rather than borrowing.

But last week a sharp rise in Government borrowing was revealed. 

It shattered hopes of achieving the Chancellor’s target without politically unacceptable tax rises or slashing public spending to a degree which would cause industrial unrest and a rebellion by the Left, led by Deputy prime Minister Angela Rayner.

The public sector amassed £20.2 billion of borrowing last month, way in excess of the £17.6 billion expected – a record outside the Covid pandemic.

The increase was driven by rises in public sector pay and higher benefits and state pensions.

Last week’s announcement by Sir Keir Starmer that the Government was rowing back on its cuts to winter fuel payments will also have to be funded by the Treasury, as will inflation-busting pay rises for teachers and doctors. 

No 10 is also under pressure to drop the two-child cap on child benefit. 

Rachel Reeves is preparing to ditch her strict fiscal rules that were meant to safeguard the Government’s economic credibility, senior Labour sources have warned

A sharp rise in Government borrowing shattered hopes of achieving the Chancellor’s target without politically unacceptable tax rises or slashing public spending to a degree which would cause industrial unrest and a rebellion by the Left, led by Deputy prime Minister Angela Rayner (pictured)

The ditching of fiscal rules is expected to be announced in the autumn Budget. A source said: ‘The winter fuel announcement was part of preparing the ground to shift on the fiscal rules.’ 

Another source said: ‘The fiscal rules will go. I was in the room when it was discussed. They will be changed’.

Labour MPs now openly discuss Ms Reeves’s political mortality, saying that if the economy doesn’t lift by Budget time she will have ‘run out of road’. 

Her prospects have not been helped by the perception that she is accident-prone after suffering adverse coverage over freebie concert tickets and claims she embellished her CV.

The Treasury’s £25 billion raid on employers’ National Insurance contributions in last year’s Budget has hit business confidence and strangled growth, causing further spikes in borrowing costs.

One minister said: ‘Rachel has been badly shaken by the backlash against her strategy.  

‘She’s started to feel isolated so she’s ringing colleagues asking what they think she needs to do and what programmes they want her to implement’.

Shadow Chancellor Mel Stride said: ‘Labour’s economic credibility, already threadbare, will be in tatters if they ditch their ‘iron-clad’ fiscal rules.

Last week’s announcement by Sir Keir Starmer that the Government was rowing back on its cuts to winter fuel payments will also have to be funded by the Treasury, as will inflation-busting pay rises for teachers and doctors

‘Rachel Reeves has never been the Iron Chancellor she claimed to be. She already fiddled the rules to allow her to borrow hundreds of billions more. 

‘If she changes them again she will be the Tinfoil Chancellor – flimsy, malleable and shaped by pressure rather than principle. A Chancellor who doesn’t stand firm – but folds when tough choices loom.

‘Fiscal rules are the foundation of economic trust. If the Chancellor can’t stick to her own rules how can the British people trust her with the nation’s finances?

‘The Chancellor has massively mismanaged the economy and, given that she has already jacked up taxes to eyewatering levels and borrowed to the point of recklessness, she is running out of options.

‘Folding on her fiscal rules will be yet another risk that the country cannot afford.’