(Bloomberg) — Critics and allies alike often cite May as the make-or-break moment for Keir Starmer. Inside his UK government, many are increasingly worried that November is his moment of greatest peril.
The British prime minister faces an increasingly restive Labour Party whose backbenchers are upset by a series of government missteps culminating in a torrid September during which he lost several members of his top team and saw his leadership questioned seriously for the first time.
The lack of a plausible successor has kept the rebels at bay for now. But if Chancellor of the Exchequer Rachel Reeves gets the budget wrong, it could galvanize Labour opposition to take more drastic measures.
The chancellor’s unenviable task when she delivers her address to parliament on Nov. 26 will be to satisfy bond markets concerned about rising government borrowing by filling a hole in the public finances that’s set to worsen as a result of a looming productivity downgrade by her fiscal watchdog. Bloomberg Economics estimates Reeves will need £35 billion ($47 billion) to restore the small buffer she enjoyed at her last fiscal statement in March. The picture worsened on Friday with data showing borrowing came in at at £18 billion in August, significantly higher than forecast.
Reeves’ weapon of choice is likely to be tax rises, but she’ll also want to avoid measures that stoke inflation or stifle growth, while keeping backbenchers happy. Given the parlous state of Starmer’s administration, languishing in opinion polls as the populist right-winger Nigel Farage’s Reform Party rides high, the November setpiece is increasingly seen within government as a pivotal moment.
One minister — who spoke on condition of anonymity in order to be candid — summarized the scale of the challenge: the departures of Ambassador to the US Peter Mandelson and Rayner were difficult, but they are nothing compared to the budget. A ministerial aide said a repeat of last year’s unpopular announcements could be fatal, arguing the stakes could not be higher: get this wrong and Farage will be on course for Downing Street.
The prime minister may have got through this week’s state visit by President Donald Trump unscathed, but there is little respite. Starmer’s expected announcement Sunday that the UK is recognizing Palestinian statehood will provoke intense debate — and friction with the US and Israel. Next weekend Labour’s annual conference sets the stage for a deputy leadership contest seen widely as a chance for the party’s so-called soft left to challenge his authority.
Worrying the Treasury most at the moment is the Office for Budget Responsibility’s expected productivity downgrade. Its assumption has been overoptimistic for years, giving extra spending room to successive Conservative chancellors. A lower estimate at the November budget will punch a hole in Labour’s spending plans that Reeves will have to make up, while also explaining to the public why it is happening now.
The move is set to deliver a major blow to Reeves’ fiscal outlook, with former Bank of England rate-setter Michael Saunders estimating a 0.2% cut in the productivity forecast would equal a £12 billion hit. Officials accept that to restore the £9.9 billion of fiscal headroom Reeves enjoyed in March, she’ll need to find tens of billions of pounds. That makes tax rises almost inevitable.
For now, UK newspapers have filled the void with speculation about potential tax rises on property and banks, frustrating officials who see them as inaccurate, irresponsible and leading to real-world consequences for investor confidence. Reeves is set to present any tax hikes — multiple options are under discussion — as fair: government code for making the wealthier pay more.
There is skepticism within Labour and among economists that Reeves can balance the books without breaking her manifesto commitment not to raise income tax, national insurance or value-added tax — which deliver two-thirds of Treasury revenue. Helen Thomas, CEO of macroeconomics consultancy BlondeMoney, said Thursday that Reeves would have to raise income tax.
Because tax rises threaten to hit gross domestic product, the chancellor will unveil a series of pro-growth measures in coming weeks, building on a speech she gave in January and drawing from a long-list of measures she’d like to implement, a person familiar with the matter said. A second planning bill is in the works with the aim of speeding up housebuilding and infrastructure projects.
The appointments of Steve Reed as housing secretary and Emma Reynolds as environment secretary are seen in the Treasury as likely to ease burdensome regulations holding up development, while Starmer’s decision to move his ally Pat McFadden into the work and pensions brief is seen as an indicator the government will try again to make savings on a soaring budget that is widely seen as unsustainable, except among Labour lawmakers who blocked any cuts earlier this year.
“Starmer and Reeves need to bite the bullet and revisit welfare spending if they are serious about going for growth,” said Peel Hunt chief economist Kallum Pickering.
If the OBR scores some of the government’s growth measures positively, that would help claw back some headroom, and there’s optimism the rollout of artificial intelligence will improve productivity. The government’s agreements on trade with the US, European Union and India could earn a small boost, but may be only a drop in the ocean compared to the productivity downgrade in the other direction.
Further complicating Reeves’ task is the widespread desire among Labour Members of Parliament for giveaways offering immediate help with the cost of living. The government has not done enough on living costs in its first year and should make sure getting them down is its top priority, a Labour MP said. Top of many backbenchers’ wish-lists is lifting a cap limiting child benefits to two children. That would cost £3.4 billion annually, according to the Institute for Fiscal Studies.
Starmer bolstered his economic team earlier this month with a series of back-room appointments that some saw as undermining Reeves, but were aimed at ensuring total alignment between Number 10 and Number 11 to ensure this budget lands better than the last. For all the focus on who has left government in recent weeks, it is those in these core economic roles who may have Starmer’s fate in their hands.
–With assistance from Andrew Atkinson and Philip Aldrick.
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