Only an EU reset can save our flatlining economy from the doldrums

It’s virtually in the chancellor of the Exchequer’s job description to wheel out empty platitudes when confronted with underwhelming economic data. Rachel Reeves’s reaction to the latest miserable UK growth figures lived up to form: “More to do”.

To give her some credit, she and the prime minister, tied by adversity now more than ever, have taxed their way to stabilising the public finances and, some wobbles aside, have managed to retain the confidence of investors rightly concerned about the UK’s debt and deficits. That she has – just – managed to stick to her fiscal rules and maintain the backing of the Office for Budget Responsibility and the Bank of England is the markets’ principal concern, and that has been met.

It has come at huge cost in terms of political capital. Ms Reeves is even more unpopular than the prime minister – another occupational hazard for chancellors in tough times.

Yet her success can be measured by the reaction of the financial markets to various Labour leadership crises. If not exactly loved in the City of London and the international bond markets, Ms Reeves is seen as the best of a bad lot. Her fiscal discipline has brought down inflation and allowed the Bank to slowly reduce interest rates, with fiscal and monetary policy in close harmony. These are the necessary, but not sufficient, conditions for longer-term growth.

Beyond that, in the real economy and the here-and-now, there is precious little sign that the government’s so-called “Mission One” to boost growth is on track. The latest national income data indicates that growth in the last three months of 2025 was negligible, and even that was helped by Jaguar Land Rover restarting production in October. Had the software engineers taken longer to recover their systems from the cyber attack, the economy might easily have gone into reverse.

As it is, the building sector fell back noticeably, which is potentially ominous news for hopes of housing and private-sector infrastructure investment. Meanwhile, the cost of living crisis continues, inflation remains above target, unemployment is creeping up, local authorities are running out of money, and businesses are still being hit by high energy bills, taxes and tighter regulation.

Ministers argue, in terms, that all this is necessary to restore the public finances and lay the foundations for growth. But even if that is true, Ms Reeves could have made different, better choices, both economic and political.

She has consistently taken risks with her “fiscal headroom”, leaving a vanishingly slim buffer against financial shocks. The 2 per cent hike in employers’ national insurance contributions was excessive; a better approach would have been to protect businesses and restrain consumption. Her panicky cuts to the pensioners’ winter fuel payment immediately after the election yielded little extra funds but used up so much goodwill that it later made it impossible to implement welfare reforms. She was thus forced to partially reverse the cuts last year.

The government does have a programme for infrastructure investment, but it is not going to be large enough or finished soon enough to deliver economic and political benefits to this government. Yet all is not lost. If she can cash in on some of the confidence she has won from investors to expand her spending on much-needed improvements in transport and education, say, that will signal to the public that Labour is still serious about restoring the economy. She should also reverse the “jobs tax” increase, restart welfare reform and tax spending rather than savings.

Much more promising is what Ms Reeves says about Brexit, a black swan event that is still depressing trade and investment a decade on: “The biggest prize is clearly with the EU. The truth is economic gravity is reality. Almost half of our trade is with the European Union. I’m all up for doing deals with India and the US and Korea. But none of them are going to be as big as what we can get to grow trade relations with Europe.”

Correct – and the “reset” negotiated by Sir Keir was an extremely welcome step change in UK-EU relations. But, as the chancellor so succinctly put it, there is “more to do”. Much more.

Even at this stage, it is plain that Labour will break its hopelessly optimistic manifesto pledge to “secure the highest sustained growth in the G7”. Yet the economy can still improve, with some encouraging signs in the latest numbers that productivity may be rising – and with it real wages. In any case, it will be, as ever, on the economy that the next election will be won or lost. In the summer of 2029, probably the optimal election timing for Labour, the name Morgan McSweeney, like Angela Rayner’s tax affairs and the “passes for glasses” scandal, will be largely forgotten.

Rather, people will ask themselves if Sir Keir and Ms Reeves have, as they pledged in July 2024, built a Britain “with good jobs and productivity growth in every part of the country, making everyone, not just a few, better off.” The government still has time to get its growth strategy right, but – to say the least – it still lacks visibility. Yet more for the chancellor to do.