Reeves Races to Find UK Growth Miracle Before Next Election

(Bloomberg) -- Rachel Reeves’ core message in her relaunch speech on Wednesday was that the UK needed to go “further and faster” in the pursuit of economic growth. But her approach left businesses and some members of the Labour government questioning if she’s going quickly enough.

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The Chancellor of the Exchequer unveiled a menu of pro-growth policies, from backing a third runway at London’s Heathrow airport to plans for new homes, towns, roads and railways. It was an unsubtle attempt to sound more positive about the economy, calm jumpy markets and turn around sentiment that has cratered since her tax-raising October budget.

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However while Reeves took action on long-term infrastructure projects ducked by her Conservative predecessors, she needs to do more to ensure benefits are reaped this year, or even by the next general election due in 2029, executives, economists, Labour lawmakers and officials told Bloomberg. The lack of a counter-balance to a business payroll tax rise taking effect in April was a glaring omission, one Labour Parliamentarian said.

“The recent shift in the government’s rhetoric to emphasize growth is very welcome,” Institute of Directors Chief Economist Anna Leach said. “But it is clear that companies continue to be challenged by the breadth and scale of cost increases announced at the budget.”

Business confidence remains near historic lows, according to an IoD survey published Saturday, which found 58% of its members said lower taxation was needed to remedy that sentiment. Even so, a separate poll of 500 business leaders showed two-thirds were more confident about future investment after Reeves spoke.

Reeves’ allies expressed satisfaction with how the speech landed, saying a strategy of trying to create a buzz around the announcements paid off, especially after turbulence in the bond market earlier this month put her under heavy scrutiny. Moreover, the Treasury is at pains to show it is listening and planning to do more.

Reeves will tell her officials on Monday that the job is not done and they now need to build momentum, with a series of major announcements planned to try to stimulate more positivity, according to people familiar with the matter who asked not to be named discussing government strategy.

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In the coming weeks, they said Labour will unveil the next steps of its industrial strategy, seen as a key moment to show ministers can “crowd-in” private investment, something that will be more sharply in focus after AstraZeneca said Friday it was abandoning plans to invest £450 million ($558 million) in a UK vaccine manufacturing plant. Prime Minister Keir Starmer will be involved in a drumbeat of interventions ahead of an “action plan” on deregulation in the Spring.

Significant welfare reforms will be announced soon to toughen health and disability benefits, another signal to markets that the government is serious about boosting productivity and controlling public spending. There are also suspicions within Labour and the trade union movement that Reeves may soften workers’ rights reforms in her bid for growth.

Meanwhile, ministers are preparing set-piece moments to promote different sectors of the economy, following a speech by Starmer on artificial intelligence last month. Officials have been instructed to go faster in rolling out AI across the public sector.

The government also believes it has the political space to argue more forcefully the need for closer economic and trade ties with the EU, while sticking to a promise not to rejoin the single market or customs union.

The question is whether all that will be enough to give the economy an immediate lift.

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“Building a new runway at Heathrow won’t get the family spending in the coming months,” Resolution Foundation Research Director James Smith said. “It’s great that the government is focusing on longer-term growth but it will take a long time for those sorts of measures to really make an impact.”

Reeves told Bloomberg on Thursday she wanted to get “spades in the ground” at Heathrow by 2029, but opponents of the expansion are skeptical. A third runway will take so long that it could well backfire and become a monument to Reeves’ inability to secure growth, one person familiar with the decision-making process said.

In the meantime, a collapse in consumer confidence is sounding alarm bells. Household spending has slowed since Labour came to power with its gloomy warnings about tough choices ahead, while growth has dropped to a standstill from the fastest in the Group of Seven at the start of last year.

With inflation above the 2% target, the slowdown has caught Reeves in a double bind. Markets are priced for weak growth and sticky inflation. That means higher borrowing costs, which have eliminated £7 billion of her £9.9 billion of fiscal headroom at the October budget, the Resolution Foundation said on Thursday, meaning further painful spending cuts may be needed.

Despite her growth plans, the Office for Budget Responsibility’s March 26 forecast will probably “tie her hands,” said Gerard Lyons, chief economic strategist at NetWealth. If Reeves wants quicker growth, she needs the Bank of England to cut rates, he said.

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Resolution’s Smith agreed. “The chancellor is not in a position to do a lot given the risks she faces in financial markets. So it’s really down to the Bank of England.” He said there’s a good chance the bank could cut rates faster than markets expect, in a bid to counteract the slowdown. Four quarter-point rate cuts this year to 3.75% would help the 500,000 homeowners coming off five-year fixed deals this year.

Yet Mohamed El-Erian, former chief executive of Pimco and now president of Queens’ College at Cambridge University and a Bloomberg Opinion columnist, warned the BOE may be more constrained as inflation headwinds remain, limiting the amount of rate cuts.

Reeves may have had some short-term success at mending the hit to her reputation since taking power. Whether that will filter through to the economy any time soon is another question.

“Rachel Reeves needs the economy to grow more strongly this year, quickly,” former Labour Shadow Chancellor Ed Balls said on his Political Currency podcast. “Sentiment is important to that, and I think undoubtedly the speech helped sentiment, but it’s tough.”

--With assistance from Ellen Milligan.

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