LONDON: Rachel Reeves will stress a commitment to stability in her first trip as Britain’s finance minister to the International Monetary Fund’s annual meetings in Washington next week, two years after the country was at the centre of a bond market storm. Reeves does not risk the same fate as her Conservative predecessor Kwasi Kwarteng, who was summoned home early from the IMF and fired by then Prime Minister Liz Truss after bond prices plummeted following their unfunded tax cut plans.
But Reeves will aim to close the door decisively on that episode, which shook investor confidence in the world’s sixth-largest economy and contributed to Labour’s sweeping July election victory.
"The relative orthodoxy on fiscal policy that the government seems to have brought in, and the relatively benign (economic) outcomes of the UK have bought them a lot of goodwill,” Adam Posen, president of the Washington-based Peterson Institute of International Economics, said.
Reeves herself is no stranger to Washington, having worked at the British embassy there as a Bank of England economist. Last year she gave a speech at the Peterson Institute on ‘securonomics’ - her approach to industrial strategy that was inspired by US President Joe Biden’s Inflation Reduction Act.
Now Reeves is barely a week away from presenting Labour’s first budget in 14 years, which looks set to raise taxes to fund higher day-to-day government spending while borrowing more to finance longer-term investment. Given hefty investment needs identified in the European Union by former European Central Bank President Mario Draghi and the large deficits run by the United States, Britain’s approach will be watched carefully, Posen said. "The public investment, accounting and fiscal rules question is a hot topic across the board,” he said.
The IMF in July said the last British government’s budget rules were "insufficiently constraining in the near-term and encourage unrealistic assumptions further out”, while the Organization for Economic Co-operation and Development said last month that they discouraged public investment.
Britain’s new government has been keen to attract private investment and said a summit in London on Oct. 14 had led to 63 billion pounds ($82 billion) in investment pledges in areas such as infrastructure and technology. A finance ministry spokesperson said Reeves in Washington would stress how the new government was "prioritizing economic stability” as "the essential precondition for the secure and resilient growth needed to address...global challenges”. — Reuters
However, some business groups dislike the downbeat tone Reeves and Prime Minister Keir Starmer have sometimes struck about the challenges facing Britain - as well as the risk that they will bear the brunt of upcoming tax rises. "There has been a bit of a chilling in investor sentiment,” Mohammad Jamei, director of economic policy at the Confederation of British Industry, said.
The political context of Labour’s criticism of the economic legacy it had inherited was not always clear overseas, he added. "While we have more nuanced discussions here in the UK, internationally these things are condensed a bit more,” he said.
Looming over the meetings is the US election, and whether Britain will soon be caught in a heightened trade conflict between the United States and China. British foreign secretary David Lammy started a visit to China on Friday after years of tension over security concerns and alleged human rights abuses. "People are very much waiting to see where the UK comes down on the big issues of China, tariffs, export controls and general orientation towards trade,” Posen said.
"On things like Russia sanctions the US and UK line up very closely. But whether that’s going to be the case for the UK going forward in terms of keeping out Chinese investment ... is very much up in the air.” – Reuters