20 April 2026: Reeves is facing a tough choice between benefits and defence

It is difficult to feel any sympathy for Rachel Reeves for the predicament that she now finds herself in. While it is true that circumstances have conspired against her, she has exacerbated the problems the economy faces by borrowing solely to increase benefit payments.

During the 2024 election campaign, there was a famous Leaders' Debate in which then-Prime Minister Rishi Sunak was as forceful as he ever was in telling the audience that, despite her promises to the contrary, Reeves would increase the tax burden on every household in the country. That this is exactly what has happened is a surprise to no one, although the issues Sunak was facing at the time meant that nothing he could have said would have rescued him from the situation.

I have said before that it is incredibly naive for any Government to expect to exist in a vacuum, unaffected by events that are taking place elsewhere. The war in Iran is going to affect the UK more than any other G20 member, and Reeves has been pitifully unable to address that growing dilemma as she clings to her mantra that day-to-day expenditures are funded by day-to-day tax income.

Added to this the slavish adherence to the Energy Secretary’s net zero strategy and the mess that the Prime Minister finds himself in over the appointment of Peter Mandelson as the UK’s Ambassador to the U.S. and it is no surprise that the country finds itself with inflation that is kindly described as “sticky”, and predictions for growth that barely tip the scales into positive territory.

Reeves faces a choice: to continue growing the country's benefits bill, or to pay for the increase in defence spending from 2.5% of GDP to 3.5%. Admittedly, the Cabinet is only committed to that increase by 2035, but she needs to be making plans during this Parliament.

A couple of weeks ago, I wrote about a meeting convened by Jerome Powell and Scott Bessent to discuss how a powerful new artificial intelligence tool could enable hackers to breach bank systems and even remotely drain cash machines.

Cybersecurity experts warned this weekend that the technology poses a serious and growing risk.

The Bank of England is preparing to hold crisis talks with leading lenders as concerns mount over the threat AI systems pose to the global financial system. Banks will be given early access to test their digital security against the new technology, which experts say poses an unprecedented risk to financial infrastructure.

The technology at the centre of these concerns is Mythos, a sophisticated AI bot created by Anthropic, a Silicon Valley startup.

The system sent shockwaves through cybersecurity circles this month after Anthropic revealed it had independently discovered previously unknown flaws in all major operating systems and web browsers.

Anthropic has deemed the tool so potent that it has restricted access to a select group of technology giants and international banks, allowing them to strengthen their defences before potential threats emerge.

Tehran’s refusal to attend a second round of talks in Islamabad, after Trump had already sent his Vice President and made dire threats about what would happen if a deal was not struck, has illustrated a major shift in America’s ability to create a positive outcome for the war in Iran.

Far from creating a situation where regime change becomes possible, the U.S. administration has hardened the resistance of both the regime and the Iranian people.

The oil price fell by nearly 10% on Friday due to the positive reaction to the announcement of a second round of talks. The opposite is likely to happen when markets open this morning, but it will be made worse by the fact that Tehran has strengthened both its position and its rhetoric.

Last week, Sterling rallied to a high of 1.3599 as risk appetite improved despite the one-sided opening of the Strait of Hormuz. Such optimism was short-lived, as Iran promptly closed it again when the U.S. announced that its blockade would remain in place until the ceasefire became permanent.

The pound closed at 1.3516 versus the dollar and 1.1489 versus the Euro.

Headlines written over the weekend already find themselves out of date as the ceasefire and talks between the U.S. and Iran teeter on the brink of collapse, and more threats to Iran’s infrastructure are made by the U.S. President, who knows only one way to operate.

The US has intercepted an Iranian-flagged cargo ship in the Gulf as part of its naval blockade, Donald Trump has said.

The US president wrote on his Truth Social platform that the US Navy seized the Touska after failing to respond to a warning to stop. Iran said it was a violation of the ceasefire and it would retaliate soon for the "act of armed piracy".

Any retaliation will doubtless be met with more U.S. aggression, the end of the ceasefire and a return to the threat to Iran. This will place Iran’s closest neighbours, including Saudi Arabia, Bahrain, Qatar, Kuwait and Oman in more danger. Iran has found during the entire conflict that the only way it can control U.S aggression is to attack the energy and domestic infrastructure of its neighbours.

While the U.S. claims that the conflict is about Iran’s determination to become a “nuclear power”, Tehran now believes it's about sovereignty over the Strait of Hormuz.

"Sovereignty over the Strait is our inalienable right," Ebrahim Azizi, a former commander in Iran's Islamic Revolutionary Guards Corps (IRGC), told the BBC in Tehran. "Iran will decide the right of passage, including permissions for vessels to pass through the Strait."

He says that's about to be enshrined in law.

"We are introducing a bill in parliament, based on Article 110 of the constitution, which covers the environment, maritime safety and national security. The armed forces will implement the law," says this member of parliament, who heads the Committee for National Security and Foreign Policy.

Every economist now feels redundant, as they find that their traditional methods of judging an economy and its prospects, including how it will control monetary policy, have been abandoned while the conflict continues. The only driver now appears to be the control over the Strait of Hormuz.

This week, retail sales, PMIs, new home sales and Michigan consumer confidence are all due for publication, but the cost of a gallon of gasoline and any renewed bombing of Iran will take precedence.

Last week’s dollar movements have also been rendered redundant as the conflict takes another turn. Nonetheless, the index fell to a low of 97.63 and closed at 98.22.

European Central Bank officials left Washington on Friday slightly more optimistic than when they arrived, as ongoing US-Iran peace talks raise the prospect of energy shipments from the Gulf resuming.

That should have been what I wrote this morning, but events over the weekend have superseded any confidence that the conflict in Iran and countries bordering the Strait of Hormuz would soon be over.

The Eurozone is back to facing further turbulence, which will mean higher inflation and lower growth and economic activity, placing further strain on the ECB's next meeting, due to take place next week.

There was optimism that the Central Bank’s Governing Council would be able to defer its discussions about tightening monetary policy, but the “arrest” of an Iranian-flagged vessel in the Strait of Hormuz by the U.S. Navy has put paid to that.

The Eurozone’s private sector in March showed its weakest expansion in nine months. This follows from the business activity index (PMI) data published by S&P Global. Activity will remain weak for the foreseeable future until there is a meaningful truce in the Gulf, possibly overseen by a neutral and trusted third party. Unfortunately, the lack of trust between Washington and Tehran makes such an event immensely difficult.

The ZEW survey of economic sentiment for April in Germany and the wider Eurozone is due to be published tomorrow, with most observers predicting a further fall into negative territory.

In mid-March, it emerged that a German drone manufacturer had been the victim of alleged espionage, leading to the arrest of two suspected spies thought to have passed on secret information to Russia. The Federal Public Prosecutor General accuses the suspects of collecting information about the company both on-site and online on behalf of the Russian secret service.

The war in Ukraine has been moved to little more than a sidebar to the conflict in Iran, despite Ukrainian President Volodmyr Zelenskii’s pleas for further aid from the European Community.

In another case at the end of March, a Ukrainian national was also arrested and accused of espionage. The Public Prosecutor General accused him of having collected information about a former fighter in Ukraine on behalf of Russia's secret services. The spying operation may also have served to prepare further intelligence operations against the target in Germany, according to lawyers.

Despite the EU facing the impact of two conflicts, one far closer to home, the other, the UK, is still facing the most significant downturn in growth and activity in the G20. That is a perfect illustration of the situation facing Keir Starmer and Rachel Reeves.

Before optimism rose and then took another battering, European Central Bank President Christine Lagarde said on Friday that risks to the region’s price outlook are skewed to the upside as officials assess the economic impact of the conflict in Iran.

"Risks to the outlook are tilted to the upside, especially in the near term, while the medium-term implications will depend on the intensity and duration of the war," Lagarde said in a statement at a meeting of the International Monetary and Financial Committee in Washington.

Lagarde said uncertainty surrounding the outlook for Eurozone inflation has increased significantly.

The ECB is determining what action, if any, it must take to contain the inflationary upswing caused by the fighting in the Middle East. Policymakers want to gather further information on the effects of surging energy prices and appear unwilling to act at this month’s meeting, though this depends on several different scenarios.

The Euro rallied to a high of 1.1849 but fell back to close at 1.1764, as volatility remained the keynote in financial markets.

Have a great day!