Chancellor Rachel Reeves has received a damning “Austerity 2.0” warning after the Chancellor was forced to grapple with an “impossible square to circle”.
The warning was issued after the Bank of England was forced to halve its 2025 growth forecast to just 0.75 percent.
Consumer-facing sectors like retail and hospitality are expected to be hit hardest by Chancellor Rachel Reeves’s £25billion employers’ National Insurance increase, the Bank of England also claimed.
Independent economist Julian Jessop accused the Government of “gaslighting the British people” about its plans, particularly regarding counter tax policies.
Rachel Reeves has been warned against a potential return to austerity
PA
“They were claiming that the Government is putting money in people’s pockets by raising the national minimum wage. Well, no national minimum wage is paid by businesses, not government, and many businesses can’t afford it,” he told GB News.
The criticism comes as recent polls show Labour’s popularity has tumbled, with Reform UK now leading at 29 per cent.
Labour secured just 25 per cent and the Tories were left languishing behind on 18 per cent.
Jessop concluded his criticism by highlighting what he sees as a fundamental contradiction in Labour’s economic approach.
“You don’t boost growth by transferring even more power and income from the private sector to the public sector,” he stated.
Julian Jessop told GB News there is a contradiction in Rachel Reeves’ policy
GB News
He pointed to an “inconsistency” in Reeves’ stance, noting her rhetoric about deregulation while implementing opposing policies in areas like the labour market.
“It’s impossible to square that circle. You can’t be at the same time pro growth and equally believe in a much bigger role for the state,” Jessop argued.
However, another economist and former advisor to the Labour Party told GB News that the Chancellor’s hands could be tied over tax policy.
Speaking to the People’s Channel, they said: “Reeves is going to be helped by the Bank of England cutting interest rates, but the bank is going to be cutting rates partly because the economy is weak.
“The important thing is that she’s not only mindful of the state of play now, she’s also got to be conscious of the end of March when the OBR releases its economic update, because the chancellor is committed to the fiscal rules.
“As she clearly indicated again last week when pressed if the OPR cuts their growth forecast for this year, and they undoubtedly will, then that could start to tie the Chancellor’s hands on future spending and tax policy.”
Rachel Reeves said last Government had left her with “difficult decisions” at the Budget PALast September, Reeves ruled out a return to economic austerity, trying to brighten the downbeat tone her party had adopted since its landslide election victory, just two months before.
When asked if we were likely to see a return to austerity, the economist told GB News: “Well, austerity is a misused word here, because spending has increased significantly.
“What we are talking about is pressure on the non ring fenced areas, so you have big increases in spending on some areas, health being the clear example, the difficulty is the spending on those non ring fenced areas, and the question is how that will pan out ahead of and after the comprehensive spending review.
“So the Chancellor clearly has an opportunity with the comprehensive spending review coming up to clearly influence that things naturally.”
Matthew Laza has offered criticism of the PM
GB News
However, former Labour advisor Matthew Laza warned that Reeves may have lost her “headroom” and that she needed to be wary of her next moves.
He told GB News: “What’s absolutely clear now with the downgrade in the growth forecast is that there is not room for a second round of tax cuts.
“She may just about have got away with the National Insurance hike. Some would say she hasn’t, but the idea that you could stick another penny on national insurance for employers was just going to just, it’s just not a non starter. Therefore, what’s the choice?
“Either she cuts spending or she finds some other taxes. They’ve got their pledge not to increase taxes on working people. There’s basically nothing else that you can increase once you set those parameters. So basically that means that if the going gets gets tougher, then we will be back to cuts, which some would call Austerity 2.0”
Rachel ReevesPA
When pressed on what he thought Reeves’ biggest mistake was since becoming Chancellor in July, Laza delivered an unequiovcal answer.
“The Winter fuel allowance, without a shadow of a doubt” he said.
“Yes, there’s a very strong case for it. There’s actually a very strong case for doing what the Government’s done in terms take away from everybody. There’s certainly a very strong case for taking away from higher rate taxpayers. They’ve done more than that.
“But what that did is it painted her as the sort of the one who’s making your granny turn her heating down…The problem Rachel’s got, she’s got a hell of a lot to work to do to erase in the public mind the idea that she’s the one who nabbed the winter field allowance for our pensioners and then put up taxes.”