Rachel Reeves' bold statement on economic stability is a tough sell in the face of potential war with Iran.
The chancellor's claim to the House of Commons on Tuesday was a strong one, but the timing couldn't have been more ironic. Just moments earlier, MPs were briefed by the foreign secretary on the escalating crisis in the Middle East and the need to evacuate British citizens.
The conflict's impact on energy prices and, consequently, inflation and growth, is a significant concern. Reeves' assertion might hold if the violence subsides quickly, but a prolonged war could render the Office for Budget Responsibility's (OBR) forecasts obsolete in a matter of weeks.
Here's where it gets tricky: As Reeves spoke, oil prices were surging, and financial markets were driving up government borrowing costs. The recent market volatility threatens to undo the improvements in public finance forecasts since the budget, which were largely due to lower interest rates on government debt.
Reeves aimed to showcase her government's ability to steer the UK through global uncertainty, especially with the conflict in Iran and the Middle East. She highlighted the OBR's prediction of lower inflation and public borrowing compared to the November budget and boasted about her government's 'headroom'.
The government's intervention in November, shifting net zero subsidies to general taxation, is expected to reduce utility bills in April. Reeves' tax increases during her initial budgets have also improved the public finances. But these gains are fragile.
A controversial twist: Former chancellor Jeremy Hunt challenged Reeves, suggesting her promises on utility bills might ring false if energy costs surge. Moreover, any rise in inflation would undermine Labor's efforts to address the cost of living crisis, regardless of who's to blame.
Even if the conflict ends abruptly, the OBR's forecasts hint at future challenges. Migration is one; the OBR's growth forecasts have been downgraded due to lower-than-expected net migration, and Labor's new migration policies could further stifle growth. Additionally, the OBR predicts a significant rise in unemployment, reminiscent of the Covid pandemic's peak.
Public opinion, as revealed by polling, is more attuned to the increasing unemployment than to lower inflation or interest rates. Reeves' message, had it been delivered a week earlier, might have signaled a calmer phase for the UK economy after a tumultuous 18 months. But with the ongoing conflict, her stability pledge may soon be questioned.
What do you think? Is Reeves' optimism about economic stability justified, or is it a risky bet in the current global climate?
