Labour Faces Economic Scrutiny As UK Debt And Inflation Concerns Mount

Chancellor of the Exchequer Rachel Reeves returned to the UK from China on January 13, as the Labour Party sought to move past recent market turbulence and highlight its long-term economic strategy. UK debt costs surged as gilts faced significant losses in a global bond sell-off, with the pound falling to its lowest point since late 2023. This economic shakeup raised concerns about Britain’s inflation, sluggish growth, and the sustainability of Labour’s plans to increase public spending.

On January 13, the pound fell further, dropping to $1.214 from $1.256 just days earlier. Some traders speculate that gilts may continue to decline, following the sharp drop in US Treasuries.

While in China, Reeves stood by her fiscal rules, describing them as “non-negotiable” despite rising yields on gilts threatening to breach these self-imposed guidelines. The situation may force Reeves to curtail departmental spending ahead of a critical fiscal update from the Office for Budget Responsibility on March 26.

“We will take actions to ensure that we meet those fiscal rules,” Reeves asserted. She was in China to foster trade relations, disregarding calls from opposition figures to return home amid the turmoil. Shadow Chancellor Mel Stride criticized the timing of her trip, urging Reeves to be in the UK, addressing the market concerns. “The chancellor should be here at her station, reassuring markets and demonstrating that this government understands the gravity of the problem,” Stride said.

Reeves is set to deliver a series of speeches over the coming weeks focused on boosting economic growth, which she has argued is crucial for strengthening the public finances.

Meanwhile, Prime Minister Keir Starmer is set to promote artificial intelligence (AI) as a key driver of economic growth. On January 13, he unveiled an action plan to implement 50 recommendations from a report by tech entrepreneur Matt Clifford. Starmer aims to position the UK as a “world leader” in AI, a sector that he claims could contribute £47 billion ($57.3 billion) annually to the economy by enhancing productivity.

Labour has pledged to accelerate the UK’s economic growth, aiming to rank at the top of the Group of Seven (G7) nations. However, economic growth has stalled since the party’s decisive victory in last July’s general election. Critics point to rising employment costs and the potential impact of stricter workplace regulations as contributing factors to this stagnation.

Stride has accused the government of undermining business confidence by imposing excessive taxes and adopting a negative tone about the economy. He also criticized Reeves for not responding swiftly enough to recent market turbulence.

The £26 billion ($31.7 billion) increase in employers’ national insurance contributions, a payroll tax, has been a particularly contentious issue. Shevaun Haviland, head of the British Chambers of Commerce, warned that the tax hike would lead businesses to raise prices and reduce investment. “Slower business investment is detrimental to growth,” Haviland stated in an interview.

Labour has laid the blame for the tax hikes on the Conservative Party, accusing the previous government of leaving a fiscal shortfall of over £22 billion.