TO SAY that Rachel Reeves’ first sixteen months as Chancellor of the Exchequer have not been an unqualified success is something of an understatement.
Since she took office in July 2024, the rate of unemployment has risen by almost a quarter from 4.1 per cent to 5 per cent, while the number of people claiming out-of-work benefit increased by a million over the past year to reach a record high of 8.3 million.[i]
Inflation as measured by the Consumer Price Index (CPI) has risen from 2.2 per cent to 3.8 per cent[ii] and economic growth has been so anaemic as to be almost indiscernible. To add insult to injury, the Chancellor’s own probity in her personal finances, from the acceptance of gifts to letting her family home, has come into question.
Support for her Labour Party has collapsed, standing at just 17 per cent at the end of October[iii], and earlier that month Labour secured just 11 per cent of the vote in the Caerphilly Senedd by-election, a seat it had held for a century.
Small wonder that Labour backbenchers are wondering whether they will be looking for new jobs after the next election.
Where did it all go wrong?
What has gone wrong, and why? And what can be done to improve the situation?
Rachel Reeves made two cardinal errors at the outset early in her term of office.
The first was to neglect the national debt, which has risen from 40 per cent of UK GDP during Gordon Brown’s term as Chancellor to 100 per cent by the time Rachel Reeves took office.[iv] This increase reflected the Government’s heavy borrowing to bail-out the banking system during the financial crisis of 2008-09, and then, just as it was recovering from that, to meet the costs of combatting the Covid pandemic.
After previous surges in government borrowing during times of emergency and war, Chancellors have sought to reduce the national debt. Rachel Reeves did not do this. She kicked the can down the road, blithely announcing that the debt would start to come down sometime towards 2030. As a result of her failure to tackle the debt problem the Office of Budget Responsibility (OBR) estimates that interest payments alone will cost the Government £111 billion in 2025/26. This equates to 8.3 per cent of all public spending, significantly more than spent on defence, education, transport, or any other public service except for the NHS.
Then, in her October 2024 Budget, she committed a second cardinal error – abandoning the spending limits set by her predecessor, increasing public spending by £70 billion[v] and raising taxes to pay for her plan to almost 40 per cent of GDP.
In an attempt to soften the blow, she promised that she was “not coming back with more borrowing or more taxes.”[vi]
That promise is about to be broken.
Taxes will go up on November 26th. The only questions are which taxes will rise and by how much, and whether the Chancellor will break Labour’s pre-election pledge not to increase income tax, VAT or employees’ National Insurance Contributions.
An alternative economic strategy
“When you’re in a hole, stop digging,” goes the old adage. But the Chancellor cannot stop digging. Even if she wished to rein back public spending, she would be prevented from doing so by her own backbenchers who went into politics with the honourable ambition of improving public services, not cutting them.
While there are no limits to what the State can (in principle) provide, there are, however, limits on what it can afford. Those limits are now being tested to destruction.
When Rachel Reeves’ economic strategy is finally acknowledged as having failed – one uses the word “when” rather than “if” advisedly – what will be needed is not mere tinkering with tax rates and public spending, but nothing more nor less than an economic revolution, with the primary objective of cutting the national debt.
If debt has risen to levels so high that it is a struggle to meet interest payments, the paramount priority of any responsible business or household must be to bring it under control, making whatever sacrifices are needed to do so.
The same principle applies to governments.
The UK Government needs to devise a programme to cut the national debt to a maximum of 90 per cent of GDP in the short term (1-5 years) and 60 per cent in the medium term (5-15 years).
The starting point of such a programme has to be the replacement of index-linked gilts with conventional gilts. Index-linked gilts are government bonds whose interest payments and final redemption value increase in line with the Retail Prices Index (RPI). Data published by the DMO[vii], the division of the Bank of England responsible for day-to-day management of the national debt, revealed that, on October 29th 2025, index-linked gilts accounted for approximately a quarter of total national debt. But the really shocking statistic is this: the DMO’s figures revealed that, while the UK Government raised £428 billion from index-linked issues, it was due to repay £687 billion – that is, £259 billion or 60 per cent more than it had borrowed, purely as a result of RPI indexation.
This amount is more than seventy times the estimated annual £3.5 billion cost of scrapping the two-child cap on child benefits, which would lift hundreds of thousands of children out of poverty.[viii] Refinancing index-linked with conventional gilts would significantly reduce the Government’s funding costs and free up funds for initiatives such as extending child benefits.
The DMO has been criticised for borrowing so much on an index-linked basis. This is not entirely fair. The DMO was entitled to assume that their colleagues on the Bank of England’s Monetary Policy Committee (MPC) would achieve their target of restricting annual increases in the CPI to 2 per cent annually. Had inflation increased by only 2 per cent p.a., index-linked borrowing would have been many billions of pounds cheaper. But it didn’t.
Instead, in the four years between September 2017 and September 2021, Sterling M4 rose by 25 per cent[ix]. During the subsequent four years between September 2021 and September 2025, inflation as measured by CPI rose by 24 per cent, while RPI rose by 31.5 per cent[x].
Remarkably, the MPC does not appear to have made any connection between these two facts. Public statements by MPC members indicate that they believe high inflation is the result of external factors over which they have no control, such as international increases in the price of food and energy.
While there is a kernel of truth in this, it fails to explain why the UK inflation rate is so much higher than the Euro area (2.1 per cent), the USA (3 per cent) or other OECD countries such as Japan (2.9 per cent) and Canada (2.4 per cent).
Sound money must be restored by controlling the growth of the money supply, so that companies and households can plan ahead, confident that £100 in a year’s time will be worth more or less the same as £100 today. This requires an MPC that takes a rather less insouciant attitude towards monetary growth than has been evident in the recent past, restricting it to between 2 per cent and 4 per cent per annum.
The yield on gilts is related to the rate of inflation. If inflation falls, so will the cost of servicing the national debt. However, if the national debt is to be cut to 90 per cent of GDP within five years, the Treasury also needs to run a primary surplus. That is to say, the Government needs to raise more in taxes than it pays for day-to-day expenses.
“Annual income twenty pounds, annual expenditure nineteen pounds, nineteen and sixpence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and sixpence, result misery,” declared Mr Micawber. The Treasury has inflicted misery on us for several years, and seems likely to continue to do so on November 26th . Yet, on the Micawber Principle, it would only require modest adjustments to the Budget to generate a surplus, and that surplus could be applied to pay down the national debt.
Rebuilding the Social Contract
The Social Contract between the State and the Citizen remains intact, but is fractured. The State provides free education and health services for all; pensions for the elderly; benefits for those who, through misfortune or ill-health, are unable to work; and protection against violent threats from criminals at home and enemies abroad. The Citizen remains willing, on the whole, to pay the taxes needed to fund these services.
However, as the burden of taxation increases, the Social Contract will come under increasing stress, particularly if taxes are used to pay for interest on the national debt rather than provide improved public services.
There needs to be a revolution in economic policy if this threat is to be addressed. The UK’s economic policy should be founded on three principles – the progressive reduction of the national debt in proportion to national Income; the restoration of sound money; and the application of the Micawber Principle in the management of the public finances. Of these three, the first – the reduction of the national debt and the burden imposed on the taxpayer to service it – must be paramount.
This analysis is based on the exposition of the Swansea School of economic theory in ‘Edward Nevin: an impression of his life, times and legacy’ (2024).
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Sources and References
[i] Geraldine Scott, ‘One million more claim universal credit without need to look for job’, Times, November 11th 2025. https://www.thetimes.com/uk/politics/article/one-million-more-people-claim-benefits-unemployed-universal-credit-ndr8z5zgq?utm_source=Sailthru&utm_medium=email&utm_campaign=Daily per cent20Briefing per cent20Wed per cent2012 per cent20Nov&utm_term=audience_BEST_OF_TIMES
[ii]https://www.ons.gov.uk/economy/inflationandpriceindices
[iii]YouTube poll, as reported by Oliver Wright. ‘Labour at poll low, one point ahead of the Greens’, Times, October 29th 2025
[iv]https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/datasets/governmentdeficitanddebtreturn
[v] According to the Office of Budget Responsibility, UK Government spending is forecast to rise from £1,279 billion in 2024/25 to £1,347 billion in 2025/26
[vi]Lora Jones & Faarea Masud , “Reeves tells firms no more tax rises as she defends Budget”, BBC, 25th November 2024. https://www.bbc.co.uk/news/articles/c33ek51rx57o, 25 November 2024
[vii]https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D1A
[viii] See, for example, https://www.bbc.co.uk/news/articles/cx2319p3dg7o
[ix]Bank of England series LPMAUYN. In September 2017, Sterling M4 was £2,352.7 billion. By September 2021, it had increased to £2,941.8 billion.
[x]Office of National Statistics. The CPI increased from 112.4 in September 2021 to 139.3 in September 2025, while the RPI increased from 308.6 to 406.1 over the same period.
