Reeves' Stability Claims Face Scrutiny Amid Iran War and Economic Headwinds
Chancellor Rachel Reeves declared to the House of Commons on Tuesday that "This government has restored economic stability," aiming to project calm in her spring forecast. However, this assertion came moments after MPs heard from Foreign Secretary Yvette Cooper about plans to evacuate British nationals from the escalating conflict in the Middle East, casting immediate doubt on the durability of her message.
Middle East Turmoil Threatens Economic Forecasts
Reeves had hoped to claim credit for steering the UK onto a more even keel after a series of policy missteps and U-turns, emphasizing the importance of stability amid global chaos. "With unfolding conflict in Iran and the Middle East, it is incumbent on me and on this government to chart a course through that uncertainty to secure our economy against shocks and protect families from the turbulence that we see beyond our borders," she stated.
Yet, the ongoing violence has already driven up energy prices, with oil costs climbing as she spoke. Financial markets have responded by increasing government borrowing costs, betting that central banks will be unable to cut interest rates further if inflation rises. This undermines a key factor in the improved public finances forecasts since the budget—lower gilt yields—which could erode if recent market movements persist.
OBR Projections and Potential Pitfalls
The Office for Budget Responsibility (OBR) provided some positive notes, expecting lower inflation and public borrowing than in the November budget, with Reeves' fiscal headroom modestly higher. Utility bills are set to fall in April due to government intervention shifting net zero subsidies into general taxation, and the public finances have improved from her previous tax rises.
However, if oil and gas prices remain elevated, the OBR's forecasts and Reeves' calm demeanor risk being overtaken by events. Former Chancellor Jeremy Hunt warned that her promises to reduce utility bills may "ring hollow" if energy costs jump, and a renewed inflation surge could challenge Labour's claims on tackling the cost of living crisis, even if externally driven.
Broader Economic Risks Loom
Beyond the immediate conflict, the OBR's forecasts highlight other vulnerabilities. Migration has been downgraded due to weaker-than-expected net migration, and Labour's new tough policies could further brake growth. Additionally, the OBR anticipates a significant rise in unemployment, potentially reaching Covid pandemic peaks, with polling showing public awareness of this joblessness spike outweighing concerns over lower inflation or interest rates.
Reeves' message of stability might have resonated a week ago, offering a calmer period after 18 months of turmoil. But with bombs continuing to fall and economic uncertainties mounting, her promise of stability may quickly prove misplaced, testing the resilience of the UK's economic recovery.
