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After a rollercoaster week which began with Keir Starmer being asked if he still had confidence in his chancellor of the exchequer and ended with the stock market smashing all previous records, the sense of relief surging through Downing Street and the Treasury on Friday afternoon bordered on elation.
The teams that surround the prime minister and his neighbour at No 11, Rachel Reeves, are made up mainly of untried novices in the hard business of running a government. They are only just learning how quickly moods, including their own, can go from one extreme to the other. “It is weird,” said one. “Truly bloody weird at times.”
When the price of government borrowing had begun to soar 10 days ago due largely to global uncertainties, threatening the very foundations of Reeves’s entire fiscal strategy just six months into government, it felt like this administration’s first real crisis could be round the corner. Young advisers in senior positions admitted privately, at the time, to fearing the worst.
But then, as they do in politics, and on the financial markets, things turned suddenly. On this occasion for the better.
The Daily Mail and the Tories had catastrophised the government’s bonds and borrowing plight for all it was worth. On Tuesday morning the Mail called out “Two Lame Ducks”. One of them, it said, was the “flailing” Reeves who was wrecking the economy with her taxes on businesses, while the other was her number two minister Tulip Siddiq, who was facing allegations over her finances and family ties. Both were examples of a chaotic, inept Labour government.
The next morning, however, the dystopian view began to look like a hysterical one. First came news that inflation had unexpectedly dipped in December, raising expectations of several interest rate cuts over the coming months. UK borrowing costs fell and the pound rose. The stock market perked up and would burst through its previous highs later in the week. Then on Friday the International Monetary Fund upgraded its growth forecasts for the UK. Reeves was suddenly and, some observed, somewhat miraculously, back on track. “The UK is forecast to be the fastest growing major European economy over the next two years and the only G7 economy, apart from the US, to have its growth forecast upgraded for this year,” was her chirpy response, which contrasted with her drawn look just days before.
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A senior aide to the prime minister was suddenly able (without any obvious sense of irony) to look back on this extraordinary up and down 10-day ride as a story of seamless and uninterrupted good governance. The centre had “not panicked” but held firm throughout, having stood by Reeves and her punishing budget last October. Unlike the Tories and their “revolving door” of chancellors, who came and went as soon as a prime ministers got nervy, Labour under Starmer was governing differently. “There is an expectation now at Westminster that if things get rocky prime ministers change chancellors but we are a lot more stable as a government.”
The same official said that Tulip Siddiq’s eventual resignation, accepted by Downing Street on Tuesday, had been part of this firm grip, this clear authority running through everything. Her departure had swept away a distraction, with due process having been observed at every stage.
Despite this kind of glowing retrospective from the inside, however, hard lessons will have been learned. If the weather could have turned so fast from foul to fair last week, officials and ministers will now know it could do the reverse just as quickly. The changes in economic data that spurred switches in market sentiment and the political mood were tiny. Inflation in December fell by just 0.1% compared with the previous month. The IMF’s upgrade on Friday for UK growth was up to 1.6% for 2025, from its previous forecast of 1.5%.
The recent sudden increase in government borrowing costs, which if repeated and sustained would leave Reeves in serious danger of failing to meet her self-imposed fiscal rules, has already led to a determination in the Treasury to drive through further cuts to departmental budgets over the next year, in order to increase Reeves’s headroom. The welfare budget is being lined up as the number one target with officials warning that this government “wants people in work not on welfare, and owning homes not claiming housing benefit”. Ministers are warning that there will be “no return to austerity” but for some it may feel like it. With Reform UK on the rise, there are those in Starmer’s team who privately relish a war on benefits.
But cuts do not engender growth. The main game in government now to is find ways, across government, to keep costs under control while promoting and stimulating sustainable economic growth, thereby generating higher tax revenues, by building more homes, cutting regulation, resetting the UK’s relationship with the EU and taking the opportunities presented by AI. Downing Street insists it now has a coordinated growth strategy.
The big and immediate fear for those on the inside, however, is the return of Donald Trump to the White House this week. “No one knows what he will do, we just have to be agile and hope,” said one Treasury source. The IMF’s report on Friday contained an explicit warning to Trump and his advisers to resist dramatic policy shifts that would endanger the stability of the US but also the global economy.
The IMF’s assessment that the US will maintain its status as the fastest growing G7 economy, with a 2.7% rate of expansion this year and 2.1% next year, was based on policies adopted by the Biden administration.
The IMF chief economist, Pierre-Olivier Gourinchas, said if Trump imposed steep tax cuts this could stimulate growth but at the risk of forcing the US Federal Reserve to prevent an inflationary spiral by raising interest rates, which would have an international ripple effect.
He also warned about the tariffs Trump has threatened to impose on imports into the US, including, potentially, those from the UK: “An intensification of protectionist policies, for instance, in the form of a new wave of tariffs, could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows and again disrupt supply chains. Growth could suffer in both the near and medium term, but at varying degrees across economies.”
Inside No 10 and the Treasury they have got through a difficult week, but they will know that amid such global economic uncertainty they could face many more in the months and years to come.
