25 March 2025: Starmer wants value for money from the Civil Service

As she prepares to deliver her spending review to MPs tomorrow, Rachel Reeves has come close to being inundated with economic issues.

The latest of those is the news that the public sector borrowing requirement, which is the amount the Treasury has to borrow every month to cover the shortfall between tax receipts and public spending, has been greater than anticipated.

In February alone, the Treasury borrowed significantly more than expected, as tax receipts fell below expectations. The Office for Budget Responsibility predicted borrowing of £6.5 billion last month, but the confirmed figure was £10.7 billion.

The Prime Minister and his Chancellor appear to be scrabbling around trying to find savings that are going to be, if not welcomed, at least tolerated by the public.

We must go further and faster to create an agile and productive state that works for the people, according to Darren Jones, Chief Secretary to the Treasury. He went on to say that this Government will never play “fast and loose” with the public finances,

Reeves is now in danger of breaking her self-imposed rules, which the OBR has confirmed are “set in stone.”

The annual borrowing figures are predicted to come in at £151 billion, which is around £23 billion more than anticipated.

Having boxed herself in, Reeves now finds herself running out of easy or risk-free options as she tries to manage the economy without a return to austerity or a repeat of the tax rises she announced in October’s Budget, many of which have not yet been implemented.

The headroom which she had expected to have allowed herself following the Budget has been all but wiped out by the higher borrowing.

Several backbench Labour MPs have said they cannot vote for a return to austerity should Reeves announce further cuts to public spending tomorrow. They have called for a restoration of Labour values where the Government is committed to providing the services necessary to ensure a standard of living that applies to all, not just the wealthy.

The level of public borrowing is currently the third highest since the OBR was formed in 1993, only surpassed by the 2008 financial crisis and the COVID-19 pandemic.

Reeves has had to find additional funding for the increase in defence spending, which has had “sprung upon her” by the Prime Minister. In fact, this is why the “Reeves’ Rules” cannot be strictly applied without any reference to the unexpected, according to several economic think tanks.

The pound again attempted to rally towards the 1.30 level yesterday, reaching a high of 1.2974, However, traders appear to have lowered the level at which they feel comfortable being short, and it quickly fell back to close at 1.2923.

Fed Chair, Jerome Powell, provided the markets with a déjà vu moment in the wake of the FOMC’s decision to leave interest rates unchanged at its meeting last week.

When inflation began to rise in late 2021, Powell insisted that the rise was transitory and would level off as the economy absorbed the additional support that the Biden Administration pumped into it post-pandemic.

He was proved wrong in that assumption, and he has often been criticized for not having the foresight to predict such an event, even though there were very few market “gurus” who expected inflation to top out close to double figures.

Now, in reaction to the threat of tariffs being imposed on U.S. imports, Powell has again said that any rise in inflation will be transitory. This may satisfy the President’s demands, but may see Powell’s “street cred” take a hit.

Nearly all experts expected the Federal Open Market Committee to hold interest rates steady at its March meeting, as it did. The focus among watchers was more on how the Fed will proceed later this year, given the level of uncertainty surrounding economic growth and inflation.

While Powell's comments about the state of the labour market sounded positive overall, as wages are now growing faster than inflation, he also said that near-term projections for economic growth have slowed while the projections for near-term inflation have risen.

At the press conference following the announcement, Powell inferred that rates would be cut twice more this year, but he would need a crystal ball to feel confident in that prediction. If the economy falters in the way several analysts have predicted then three or even four cuts may be needed, but if the tariffs produce a surge in inflation that is entirely possible, then that number could be significantly less, possibly falling to zero. At that point, stagflation may become an issue.

The only forecast that Powell can feel confident of is that under this President, uncertainty will remain high.

In his latest pronouncement on tariffs, Trump announced yesterday that he is considering adding a 25% tariff to U.S. imports from nations that buy oil from Venezuela.

This approach, which is akin to having zero long, or even medium-term strategy, will make markets even edgier.

In a speech yesterday, Federal Reserve Governor Michael Barr discussed the challenges small businesses face and potential solutions to enhance their growth and sustainability.

Barr emphasized the significant role small businesses play in the U.S. economy, contributing nearly half of the country’s gross domestic product and employing almost half of all private sector workers.

Small businesses have been responsible for over 60% of net new jobs since 1995, while business applications have consistently remained at around 5 million annually since mid-2020. The number of small businesses owned by minorities increased by nearly 60% and the growth rate for women-owned businesses was close behind at 50%.

The administration needs to consider and protect this sector as it seeks to deregulate the Federal Government.

The dollar index closed higher for the fourth session in succession yesterday., It rallied to a high of 104.44 and closed at 104.31.

The green shoots of recovery appear to be taking hold in the Eurozone economy as Germany awakes from its slumber to make a positive contribution to activity and output.

The solution to the region's economic woes over the past two years has suddenly become obvious as it became mired in its largest economy’s slavish devotion to conservative fiscal policy, which was holding Germany back.

Eurozone business activity grew at its fastest pace in seven months in March, supported by an easing in the long-running manufacturing downturn despite slower growth in services, a survey showed, according to the Reuters News Agency.

However, the underlying long-term trend is still for further weakness, as the positive effect of Germany’s decision to create a Eur 500 billion growth fund is still in its infancy and needs a lot of “meat to be added to the bare bones.”

The flash PMI survey data showed the eurozone economy expanding marginally at the end of the first quarter, putting the region on course for positive but sluggish 0.1% GDP growth.

However, the headline data masked varying sector performances, and in particular signs of a revival in eurozone manufacturing, led by Germany. While in part driven by pre-tariff shipments to the US, the production upturn also reflected indications of domestic demand picking up in the region, albeit limited to the goods-producing sector.

Business conditions meanwhile continued to deteriorate in the service's economy, though, and with inflation signals remaining benign, the ongoing contraction of this major part of the region's economy will fuel hopes of a further imminent interest rate cut by the ECB.

The sluggish increases in output recorded over recent months have, however, masked a significant change in the performance of the region's manufacturing economy.

Manufacturing production returned to growth in the eurozone during March, rising for the first time in two years and to the greatest extent since May 2022. The rise represents a sharp contrast to the severe rate of decline recorded by the survey as recently as last December, the rate of deterioration having eased markedly in the first two months of 2025 before edging back into growth at the end of the first quarter.

While new orders for goods continued to fall, down for a thirty-fifth successive month, the decline was only marginal and the smallest yet recorded over this near-three-year period.

Export orders also continued to fall, albeit at their slowest rate for nearly three years.

Over the past decades, the euro area has lagged in productivity growth as it has failed to reap the benefits of the digital revolution. That is according to ECB Executive Board Member and rate setter Isabel Schnabel.

She went on to say that recent challenges, including higher energy prices, China moving up the value chain and trade fragmentation, have further strained competitiveness and economic growth.

By shifting policy priorities towards innovation, integration and investment, the euro area can overcome stagnation and embark on a new era of economic prosperity while strengthening its sovereignty.

There is a distinct change in mood in the region currently, which is not being fully borne out by the hard data. There is still a long way to go before the Eurozone is firing on all cylinders, but it is a positive and welcome first move.

The Euro lost further ground yesterday as the dollar’s recovery continued. It fell to a low of 1.0771 and closed just a couple of points higher.

Have a great day!