Labour’s economic reality check approaches

Good morning. The pound is down, gilt yields are up. I’m not going to pretend to have a particularly novel insight into what is driving the growing cost of UK government borrowing — read Louis Ashworth over at Alphaville for an excellent take on that. But what I will say is that it looks like it will force Labour’s moment of reckoning with the promises it made at the election to this March.

The increasing cost of the government’s debt is putting Rachel Reeves’ fiscal rules in peril, which adds further pressure on the pledges Labour made at the last election to both improve the UK’s tattered and struggling public services and avoid increases in national insurance, value added tax and income tax. Some more thoughts on that below.

Rise and grind

In 2019 and 2024, the winning party in both elections promised that public services would improve, and that someone else would pay for it.

It has always been obvious that Labour was going to, at some point in its term of office, confront the trade-offs between its promises on tax and its commitments on spending. What was less obvious was a) what the precipitating event would be and b) how the country would take it.

I think we now have a pretty clear sign of what that moment will be: the pressure on the public finances means that something will have to give in order to keep to the terms of the government’s fiscal rules. In our explainer about both the root of the problem and what Rachel Reeves will do next, we say that if Reeves needs to tighten fiscal policy, it is likely to come via spending cuts, not tax rises.

But that word “likely” is worth paying attention to: one reason why many officials across government felt there needed to be a change of approach in Downing Street is that the previous operation, headed up by Sue Gray, was insufficiently political. Since the change, special advisers in other departments say that meetings with Downing Street have become clearer, more orderly, and that they have a better (which isn’t, to be clear, quite the same as “good”) understanding of what the prime minister wants.

In general, even when the prime minister and the chancellor of the day get on at a personal level, what the prime minister wants is to spend money and the chancellor wants to save it. One sign of whether or not the new look Downing Street really is capable of inserting greater direction will be to what extent the decision about how to deal with Labour’s moment of truth is made in the Treasury. Or it will show in whether Keir Starmer appears to have listened to Robert Shrimsley and remembered that it is his job to act as first lord of the Treasury.

Now try this

There’s a new Franz Ferdinand record out, so I will be listening to that a lot this weekend.

Have a lovely one, however you spend it.

Top stories today

• This could take some time | More than half of the English county councils scheduled to hold elections in May look set to request a postponement in response to the government’s sweeping plans for devolution.

• Glum faces | Whitehall departments are bracing for harsher spending settlements this summer as the Treasury seeks savings following a jump in its borrowing costs. “We’re already having to think about how we can do what we’re planning with even less,” said one Home Office official. “We are concerned.”

• Case for a ‘limited’ inquiry | Greater Manchester’s mayor Andy Burnham has said he would support a “limited” inquiry into the UK’s grooming gangs scandal, after the government voted down holding a new probe.

• Have your stake and eat it | Keir Starmer’s chief business aide will continue to receive dividend payments from his multimillion-pound stake in corporate advisory firm Hakluyt while in government, raising fresh concerns about potential conflicts of interest. Varun Chandra “no longer has any voting rights or decision-making role in the firm”, Hakluyt said.

• To the rescue | Actor Michael Sheen is funding a new theatre company to fill the gap left by the folding of the National Theatre Wales and he will be the artistic director of Welsh National Theatre, the BBC reports. His announcement comes a day after the Senedd Sports and Culture Committee published a report showing Wales is close to the bottom of Europe when it comes to public spending per person on culture and sport.