24 March 2025: Reeves is taking a “chainsaw” to the civil service

The Treasury needed to borrow four billion pounds more than was budgeted for last month, as tax receipts were lower than expected. This will come as another blow to Rachel Reeves as she puts the final touches to her spending review, which will be presented to Parliament on Wednesday.

Concerns are being raised over whether she will risk becoming even more unpopular with voters by going back on her word not to raise taxes again, rather than incur the wrath of her MPs from the Labour backbenches by making swingeing cuts to public services to go along with the highly unpopular changes to the benefits system that were announced last week.

Reeves retains the confidence of the Prime Minister, but with Labour’s popularity rating plunging in opinion polls ahead of the local and metropolitan council election due in early May, could Keir Starmer consider changing one of his most important lieutenants?

Rachel Reeves has promised the UK’s economy and living standards will improve, as she pledged to cut government running costs by 15% and civil service jobs by 10,000.

Before Wednesday’s spring statement, the chancellor defended her stewardship of the economy since the election, saying she had made difficult choices.

I am not satisfied with the numbers that we see at the moment "It’s not possible within just a few months to reverse more than a decade of economic stagnation, but we are making the changes necessary to get Britain building again, to bring money into the economy.”

With such a significant majority, voters are asking questions regarding why Reeves and her colleagues are in such a hurry to see improvements when the public would have more sympathy for the mess they inherited if they were not seemingly constantly bombarded by higher government borrowing, tax increases and spending cuts.

All this comes as the economy is still struggling with the effects of the cost of living increases that have taken place since the end of the COVID-19 pandemic.

Reeves also hinted that the government might be prepared to scrap the £1bn-a-year digital services tax that affected large US tech companies to strike a deal with Donald Trump to avoid trade tariffs.

“We want to make progress. We do not want to see British exporters subject to higher tariffs, and we want to see trade barriers fall right across the world.”

Scrapping or watering down the tax would be controversial at a time when the government is preparing to save about £5bn on welfare costs by cutting disability benefits.

The deputy leader of the Liberal Democrats, Daisy Cooper, said the move would be “tantamount to robbing disabled people to appease Musk and Trump”.

Reeves and Keir Starmer are facing the prospect of a Labour rebellion over the welfare changes, with unhappiness on the backbenches and also among unions about the proposed spending cuts.

Economic policy has taken over from monetary policy as the main driver of G7 economies, with the changes of government seen in the UK and the U.S. as well as the EU, having needed to acknowledge the structural changes needed to see its economy begin to grow again.

The pound had a quiet week last week as the MPC’s decision to cut rates offset the news that the economy has barely grown during the first quarter.

It fell to a low of 1.2887 and closed at 1.2920, having earlier “popped its head above the parapet” at 1.30.

President Trump is seemingly using his relationships on Wall Street to try to influence the Fed to cut interest rates, even though the economy currently remains robust and inflation has barely changed for months.

FOMC members have stoically supported Fed Chair Jerome Powell by insisting that they do not need to hurry to loosen monetary policy, given the most recent employment and inflation reports.

Several news services are reporting that data is diverging wildly, fuelling a debate over whether rising anxiety from President Donald Trump’s trade policies will push a moderating economy into a serious downturn.

Surveys of sentiment among households and businesses, known as “soft data,” warn of a marked slowdown as Trump pursues tariffs and steep cuts to federal spending.

But “hard data” from government statistics, such as employment and manufacturing, suggest those fears, potentially including stagflation or even recession, are overblown.

Many observers detect the hand of the President “massaging” the soft data to provide him with ammunition to push Powell hard to cut rates.

The Fed Chair has responded by saying that he and his colleagues can fulfil their mandate to promote growth and employment without driving inflation higher by “ignoring the noise” and waiting to see the full effect of Trump’s economic policies such as imposing tariffs on imports of a range of products and raw materials from some of the countries largest trading partners such as China and Europe, as well as partners closer to home like Mexico and Canada.

The new Canadian Prime Minister, Mark Carney, will meet the King’s representative today to ask him to dissolve Parliament to hold elections, which Carney hopes will give him a strong mandate to fight the tariffs that have been imposed on Canadian exports of steel and aluminium, among other raw materials, to the U.S.

The tariffs' on-again, off-again nature and size have encouraged the Fed to allow the entire situation to become less fluid and more solid so that it can make lasting judgments on their effect on the economy.

Data from the Fed’s favoured measure of inflation is due to be released on Friday, with several members of the FOMC due to speak following last week’s decision to leave rates unchanged.

Personal Consumption Expenditures are expected to have fallen further in February, further justifying the Fed’s wait-and-see policy. The final cut of Q4 GDP will also be published this week, with the economy having officially grown by 2.4% between October and December.

The dollar recovered from its major fall from the week before. It rallied to a high of 104.22 and closed at 104.15 as the effect of the Trump economic policy’s effect on other G20 economies was considered.

Eurozone consumer confidence fell by 0.9 points in March from the February number, figures released on Friday showed.

The European Commission said a flash estimate showed Eurozone consumer morale worsened to -14.5 this month from -13.6 in February. Economists polled by Reuters had expected a rise to -13.0. In the European Union as a whole, consumer sentiment fell by 1.0 points to -13.9.

The data, collected between 1 and 20 March, reflects growing unease among consumers about the strength of the recovery and external risks, including the potential inflationary effects from higher tariffs.

The ECB has constantly stated that the effect of any Tariffs will be mostly on economic growth rather than inflation, but hawkish Governing Council Members insist on citing inflation, which is a headline grabber to try to halt the continued series of rate cuts.

“Consumer confidence veered further away from its long-term average again,” according to the report.

On Thursday, ECB President Christine Lagarde told the European Parliament that the prospect of higher US tariffs could shave as much as 0.5 percentage points off eurozone growth while adding a similar amount to inflation.

The US is set to impose reciprocal tariffs on European goods as early as April 2, with the EU’s countermeasures delayed until mid-April.

Germany’s upper house of parliament, the Bundesrat, on Friday approved a landmark spending package that dismantles decades of fiscal restraint. The plan, which includes a €500 billion fund for infrastructure and eases borrowing restrictions for defence spending, signals a major policy shift in Europe’s largest economy.

This marks the end of an era for the German economy, as it has been dragged “kicking and screaming” into the 21st century.

While financial markets responded positively, the real economic impact will depend on how funds are allocated and when they are deployed.

The German fiscal paradigm shift is a change to the economic outlook for the second half of 2026 at the earliest and more tangibly for 2027-30, provided spending is even remotely productive.

The digital euro is a relatively unknown commodity, but the European Central Bank (ECB) has been working for some time to make it the next revolution in European currency.

Christine Lagarde has been dropping hints about what it will be and how it will be implemented, but beyond the theoretical approach, the technical part is still in its infancy. However, little by little, there is more and more talk about the digital euro.

Philip Lane, the Central Bank’s Chief Economist, is already on board. He believes that European reliance on U.S. payment firms like Visa and Mastercard and payment platforms like Google Pay and Apple Pay have placed the region at a competitive disadvantage, as well as a danger of losing monetary control.

Last week, the Euro took on a more familiar tone as the economic effect of the upcoming tariffs spooked traders into cutting long positions. The common currency fell to a low of 1.0797 and closed at 1.0816.

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