30 September 2025: Are the UK’s fiscal problems too big to fix?

The Labour Party Conference is taking place in Blackpool this week, and the Party’s hierarchy is trying hard to portray it as a united and cohesive party that has moved forward following its stunning election victory fifteen months ago.

Unfortunately, several members of the Cabinet have demonstrated their inexperience in wielding power and have been dealt harsh lessons in the differences between Government and Opposition.

One such victim has undoubtedly been the Chancellor of the Exchequer, Rachel Reeves, who has struggled to fulfil most of the pledges that she made when she took office. She has also discovered that ever-changing global events can easily divert her policies off course.

Her promise not to increase personal taxes has mainly been fulfilled. However, her policies have occasionally been open to interpretation, most notably the increase in employers’ National Insurance and the changes to inheritance tax on family-owned farms that she introduced last year.

Yesterday, in her speech to the Conference, Reeves hinted that tax hikes could feature in her November Budget as she ruled out more borrowing to fill the black hole in Britain’s public finances. She rejected calls from several delegates to relax her self-imposed borrowing rules, saying there would be no return to the mistakes made by Labour in the past.

One of those voices belonged to Manchester Mayor Andy Burnham, who is receiving encouragement to challenge the Prime Minister for the leadership, as well as criticism of his opportunism in roughly equal measure.

Labour plans to introduce a new scheme aimed at reducing, if not removing, youth unemployment. When it introduced such a scheme when in office previously, it was costly and failed to tackle the issue.

It comes after defiant Andy Burnham hit back at those demanding he make “simplistic statements of loyalty” to Sir Keir Starmer, saying they were “underestimating some of the peril” Labour was in.

Sir Keir tried to rally Labour MPs at the start of the party’s annual conference in Liverpool on Sunday, but was still facing questions from within Labour over his leadership.

The introduction of a new Youth Guarantee employment scheme, in which paid work will be offered to young people who are not in education, training or work, is not the turning point that Reeves and Starmer have promised.

Those who refuse the placement without a “reasonable excuse” could be stripped of their benefits after 18 months. The Chancellor is right to identify youth unemployment as an increasingly pressing issue. One-quarter of the working-age population is currently unemployed.

Rachel Reeves faced a tricky balancing act as she addressed the Labour faithful in Liverpool.

Ahead of what many see as a make-or-break budget in November, the Chancellor needed “to assure her restive colleagues that she can put the economy in the service of beating the populist right without undermining her reputation for fiscal prudence”,

Her speech had to be “a mix of pro-growth initiatives, back-to-work support and pledges of fiscal restraint” amid growing alarm that “poll-topping” Reform is successfully exploiting Britain’s seemingly intractable economic problems of high debt, slow growth and low productivity.

This triple threat could still derail Labour despite the significant time it has at its disposal to turn things around.

The pound has had a positive start to the week as concerns about a Federal shutdown plague the U.S. It climbed to a high of 1.3456 and closed at 1.3429.

The threat of a shutdown of the Federal Government no longer impresses the financial markets, which see this as simply another attempt by Congress and the President at brinkmanship or “crying wolf”.

Doubtless, one day the deck of cards will come tumbling down, but this year it is unlikely to happen.

Many federal operations will pause, and non-essential employees will be furloughed or laid off if lawmakers cannot reach an agreement by the end of the current fiscal year today.

That would likely delay the release of gold-standard government economic releases, including, first and foremost, the latest jobs report from the Bureau of Labour Statistics.

Given the uncertainty about the impact of US President Donald Trump’s policies on the American economy, federal gauges of employment, inflation, and spending are all the more critical. Any postponement could hamper key policy decisions, such as whether the Federal Reserve should cut interest rates again when it meets next month.

Should the Government shut down after today, the first significant release poised to be affected is the BLS employment report, scheduled for Oct 3.

The agency’s marquee report on inflation, the consumer price index, would be the next big one on the docket. At the same time, reports on retail sales and new residential construction from the Census Bureau are also at risk of being delayed.

The FOMC requires reliable data to make informed decisions on interest rates next month, following its decision to implement its first rate cut of the year earlier in September.

Over the weekend, Trump used Truth Social Media to post a cartoon of him yelling “You’re Fired” as a dejected-looking Jerome Powell carries a box of personal belongings. The post had no text accompaniment, and the White House did not explain whether this was a harbinger of things to come or another example of Trump trolling Powell. The latter is more likely.

The aspects of a president’s authority to fire Federal Reserve officials are being debated as Trump attempts to remove Federal Reserve Governor Lisa Cook following accusations that she committed mortgage fraud.

Cook, who has not been criminally charged, has sued the president to halt his actions, while Trump has asked the Supreme Court to determine whether he can remove her from office based solely on unsubstantiated charges.

Federal Reserve Bank of New York President John Williams remarked yesterday that emerging signs of weakness in the labour market drove his support for cutting interest rates at the most recent central bank meeting.

“It made sense to move interest rates down a little bit” and “to take a little bit of the restrictiveness out of there,” to help ensure ongoing health in the job market while still keeping some downward pressure on above-target inflation levels, Williams said during an appearance in Rochester, New York.

Meanwhile, Atlanta Fed President Raphael Bostic said inflation concerns would make him hesitant for now to declare support for cutting rates again in October, even though economic risks have shifted in recent months toward greater worries about employment.

Bostic said in an interview that he pencilled in only one rate cut for all of 2025 at the Federal Reserve’s meeting last week. Because officials cut rates last week, it suggests that Bostic doesn’t currently anticipate the need for another reduction at either of the two remaining meetings this year.

However, official data, should it be published, often changes the minds of rate-setters, so the market will remain in “wait and see” mode.

The dollar index started the week on the back foot yesterday as the market was driven by the fears that a Federal shutdown may actually happen this year. It fell to a low of 97.77 and closed at 97.94.

European Central Bank chief economist Philip Lane said he doesn’t see any significant risks to inflation in either direction, suggesting he and his colleagues may be happy to leave interest rates where they are for the time being.

“It doesn’t look like we’re going back to the pre-pandemic equilibrium of very low inflation,” Lane told a panel discussion Monday in Frankfurt. But neither does it appear that there are “substantial risks of remaining noticeably above the inflation target, either.”

Comfortable with the growth of consumer prices, the ECB left borrowing costs at 2% for a second meeting this month and is expected to do so again in October. Investors and economists no longer predict cuts beyond the eight already enacted this cycle.

Lane, who has been absent from the “circuit” since early summer, is considered to be a moderate who sees the ECB’s mandate to control inflation as being “too narrow”. This most likely stems from his tenure as Governor of the Bank of Ireland, when he had to deal with an economy that was on the verge of collapse.

He argued that a convergence toward 2% instead of a plunge below is “plausible” due to robust demand. A recovery in real wages is stoking consumption while interest rate-sensitive sectors are only starting to respond to lower borrowing costs, and there’s more fiscal support than usual, Lane said.

Eurozone inflation is now on target, and no sustained undershooting is likely; however, the ECB should keep all its options open for future policy moves amid exceptional uncertainty, Bundesbank President Joachim Nagel said yesterday.

The ECB has cut interest rates eight times since last June but signalled a pause in policy easing for July, and markets now see just one more cut, possibly at the end of the year, taking the deposit rate to 1.75%.

But Nagel said the environment could shift so quickly that committing now to either a pause or a cut would not be sensible, and that the ECB should remain flexible.

"Rather, we must keep our eyes and ears open for the risks to price stability," he told a conference in Frankfurt. This is also true in light of current developments in the Middle East and elsewhere.

Nagel said he expected German economic growth to stagnate in the second quarter and predicted that the global trade war could cost Germany three-quarters of a percentage point in development over the medium term.

Further interest rate cuts could jeopardise hard-won price stability, as the Eurozone economy is already set for a boost from rising German public spending.

Businesses in the Eurozone have become less gloomy. However, they are not showing much positivity either, as concerns remain about the solidity of the trade agreement between the U.S. and the European Union.

The EU’s sentiment indicator rose to 95.5 from 95.3 in September, although it remains below its long-term average, an indication that confidence remains weak.

The single currency rallied to a high of 1.1754 yesterday, as the market remains in a fluid state, eventually closing at 1.1726.

Have a great day!