03-07-2025
Reeves has destroyed her fiscal headroom and will now bring ruin on Britain
Perhaps it should be known as the 'teardrop premium'? Re-wind three years to the fiscal crisis triggered by Liz Truss's mini-budget, and the term 'moron premium' became popular among City traders. It described how Britain had to pay a bit extra on its borrowings to allow for the fact that the country was run by people who appeared completely crazy.
Now the markets are charging more to lend money to a nation whose finances are run by a woman who cries in Parliament. It might be fair or unfair. That does not matter very much. What is absolutely clear is this: with her tearful performance, the Chancellor Rachel Reeves has destroyed her fiscal headroom, and will now bring ruin on the UK.
We will probably have to wait for her memoirs – which given her taste for tweaking her CV might be titled something like 'How I Became Britain's Greatest Ever Chancellor And Saved The World' – to find out the real story behind yesterday's extraordinary scenes in Parliament.
It might have been a personal issue. It could have been a furious row with the Speaker. Or it might have been existential despair at the state of the public finances, and the prospect of breaking all her promises not to raise taxes again in the Budget next autumn.
In the end, it does not matter very much. It is the consequences that matter. And it is already obvious that she has wiped out what little remained of her fiscal headroom.
The sight of Reeves crying in Parliament dramatically illustrated two points. First, the woman who described herself as the 'Iron Chancellor' has now lost control not only of her own emotions, but more importantly of the nation's finances. The option of controlling spending no longer exists because her backbenchers won't tolerate it. Next, the 'fiscal rules' she invested so much political credibility in sticking to have now been shredded.
The result? Borrowing costs have already been pushed sharply higher, and are likely to rise even further over the course of what looks set to prove a treacherous summer for the British economy. Gilt yields spiked up yesterday, rising 16 basis points in the space of a few hours, and while they moderated slightly this morning (Thursday) they will stay high so long as Reeves clings on to office.
In her first Budget, Reeves recklessly gambled with the nation's finances. By leaving herself a mere £10 billion of 'fiscal headroom' she placed a massive bet that 'stability' would unlock a wave of investment; that money 'invested' in GB Energy and a National Wealth Fund would generate quick returns; that the non-doms would cheerfully pay tax on their global earnings instead of catching the first flight to Dubai; and that business would absorb the extra tax she was forcing them to pay, and sign up for an 'industrial partnership' that would reboot growth. None of it has worked.
The blunt truth is this: Britain will be paying the 'teardrop premium' for as long as Reeves clings desperately to office. The debt will keep mounting, and even worse, the amount we have to pay to service all that borrowing will keep on going up as well.
She promised to make the UK the fastest-growing economy in the G7. Instead, she has taken the country to the brink of economic collapse. It will get very messy. And it is too late for Reeves to do anything to avoid it now – her credibility has already been destroyed.
