Things aren’t adding up for Labour – on the economy, spending or CVs

New economic and geopolitical realities could force Rachel Reeves to hold an emergency Budget, writes Paul Montague-Smith, senior counsel – public affairs at MRM.

By the time you read this we’ll know how the Prime Minister’s meeting with the US President has gone. Donald Trump’s first days in office have been as radical as he himself suggested they would be, causing widespread confusion, concern and consternation, in the US and abroad.

Europe is waking up to realise that with a Trump/MAGA administration it can no longer count on the US to bankroll and enforce its security. In fact, it can’t count on anything, including seemingly incontrovertible truths such as who was the military aggressor between Russia and Ukraine.

The chaos and confusion stemming from US policy is having the impact Trump wants. Ukraine looks set to give minerals and rare metals as payment for US military support, without security guarantees attached. European countries are committing to increase the share of GDP they will spend on defence. On trade, countries are rushing to try and do deals with the Trump administration to avoid punitive tariffs and a damaging escalation of tit-for-tat measures.

All of this could significantly impact our security and economic fortunes for years to come and is already making life even more difficult for the Government’s management of the public finances.

The Prime Minister’s announcement on increased defence spending ahead of his meeting with the President is a clear nod to this new reality. The proportion of GDP we spend on defence will hit 2.5% in 2027, three years earlier than planned, with an ambition to hit 3% in the next Parliament. The initial increase is being funded by a corresponding decrease in our international aid budget.

Not for the first time there was confusion about the numbers. The Prime Minister told the Commons that it would mean an extra £13.4bn a year from 2027. But the cut in international aid equates to less than half of that. The statement published on the Number 10 website talked about “an increase of £13.4bn year on year compared to where we are today”. Either the PM was badly briefed or he misread his script. But the ensuing confusion and his avoiding acknowledging a mistake hasn’t instilled confidence.

While the increase in defence spending is being funded by cuts to international aid, the numbers aren’t adding up for the Chancellor on the economy more widely either. Government borrowing is some £12.8bn above forecast. Debt interest payments are also running higher than expected, while tax receipts have been lower than forecast, particularly self-assessment and corporation tax.

Combined with stalled growth, low business confidence and the impact of the coming higher national insurance contributions on jobs, the expectation is the Chancellor’s fiscal headroom has evaporated. The OBR’s Spring forecast will show a need for more tax and/or less spending to meet the Government’s ‘iron clad’ fiscal rules.

The problem for the Chancellor is she committed to one major fiscal event a year, the Autumn Budget. The Spring Statement is meant to be an update without new tax or spending announcements. If the OBR says action is needed for the Government to stick to its fiscal rules, she’ll either have to wait around seven months to announce them, or risk being accused of having to hold an ‘emergency budget’. If she does decide to wait, the markets may react by making its lending to the Government more expensive.

The Chancellor is therefore in an unenviable position in having to navigate the fiscal and growth conundrum she faces. Meanwhile she and other ministers are under pressure for having allegedly sexed up their CVs. The Chancellor has been accused of misrepresenting her role at HBOS and her length of time at the Bank of England. There are also questions about an apparent investigation into her business expenses while at HBOS, and the timing and terms of her departure.

Other senior ministers are also under scrutiny about how they have presented their credentials. The Deputy Prime Minister Angela Rayner is accused of misrepresenting how long she was a home carer.

Perhaps most difficult is the position of the Business Secretary Jonathan Reynolds, who is accused of describing himself as a former solicitor in the House of Commons and on election material, when he didn’t complete his training. Whether or not it was an oversight, there are potential legal consequences. Nigel Farage has promised a private prosecution if authorities don’t hold Mr Reynolds to account.

These difficulties and skirmishes are all, of course, small beer and perhaps an unhelpful distraction when we look at what is happening around the world and the challenges we face. But it serves to undermine confidence in the people we have entrusted to lead us through the choppy waters around us – waters that could quickly turn very stormy indeed.