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Chancellor Rachel Reeves is preparing to set out a fresh push for fiscal discipline, closer ties with the EU and planning reforms, in an effort to reassure fraught Labour MPs after an expected defeat in elections next week.
Sir Keir Starmer, prime minister, and Reeves are under mounting pressure from within their own party, following the latest Peter Mandelson revelations, but their allies insist they will stand or fall together.
Further shockwaves are expected this week, with Starmer’s former chief of staff Morgan McSweeney and former head of the Foreign Office Sir Philip Barton both giving evidence in parliament on Tuesday about Mandelson’s vetting for the role of US ambassador.
Starmer on Sunday insisted he would lead Labour into the next election, while Reeves will use key speeches in mid-May and June to flesh out a “responsible” plan to see households and businesses through the Iran war fallout.
That will include targeted support for energy bills, mainly in winter. Reeves will warn that any massive bailout funded by borrowing would cause pain later through higher interest rates and mortgage payments, allies of the chancellor told the FT.
Reeves will in June set out plans to go “further and faster” on measures to boost growth, including cutting trade barriers with the EU, another attempt to overhaul Britain’s planning regime and efforts to increase the use of AI.
In response to speculation that Starmer might sack Reeves after the May 7 elections, Number 10 pointed to the prime minister’s words last year that he had “full confidence in the chancellor and he’ll be working with her in the role for the whole of this parliament”.
Reeves’ supporters argue that the chancellor has the backing of the markets, with one saying that “hell will freeze over” before Starmer sacked her. Bond yields have risen in the past at any suggestion that Reeves was about to leave the Treasury.
“There’s a respect for Reeves and moving from that known quantity would be viewed as a negative,” said Gordon Shannon, fund manager at TwentyFour Asset Management.
Jason Borbora-Sheen, a portfolio manager at Ninety One, another asset manager, said removing Reeves would “speak to the instability at the top” that could ultimately lead to a new Labour leader who takes a less market-friendly approach.
But the Labour leadership knows the mood is febrile and that the hours and days after elections in Scotland, Wales and English councils will be moments of high danger. “Nobody knows how the party will react,” admitted one cabinet member.
Reeves’ allies insist that Britain cannot afford the “chaos” of a leadership contest during a global economic crisis and the chancellor will use two interventions in the coming weeks to try to set out a plan to get through it.
A Treasury source said: “The war in Iran will continue to bear down on our economy and we have taken action. That’s why in the weeks [ahead] the chancellor will spell out the next phase of our plan to protect family finances and go further to deliver economic security.”
People briefed on Reeves’ thinking expect her to focus her energy bill support on the most vulnerable, although there might be limited support for all consumers.
One ally of Reeves said that taking £100 off all bills would cost around £3bn, which could add to a rise in interest rates for government and consumers.
“Responsive and responsible means not taking knee-jerk action that would cost households more from higher inflation and interest rates,” the ally said.
The chancellor’s warnings on fiscal discipline will also be seen as a shot across the bows of some of Starmer’s leadership rivals, including Greater Manchester mayor Andy Burnham, who has spoken against being “in hock” to bond markets.
Reeves will also push for the government to push further on planning reforms, having been forced to retreat on some plans in 2025.
Chief secretary to the prime minister Darren Jones warned on Sunday that energy, food and air travel prices are likely to increase in the coming months.
“There’s going to be a long tail from this,” he told the BBC, adding that the government’s “best guess” was that prices will keep rising for more than eight months after the conflict is resolved.