Reeves’s talk of stability may be misplaced amid Iran war turmoil

Attempt to project calm in spring forecast may be short-lived if living costs and unemployment keep climbing

“This government has restored economic stability,” Rachel Reeves told the House of Commons on Tuesday.

Yet the chancellor was speaking just moments after MPs had been hearing from the foreign secretary, Yvette Cooper, about plans to evacuate British nationals from the escalating conflagration in the Middle East.

Should the violence that has sent energy prices soaring abate, the impact on inflation and economic growth will be short-lived, in which case Reeves’s bold claim about economic stability may just about stand.

But if the conflict is prolonged, then the Office for Budget Responsibility’s (OBR) forecasts will look hopelessly out of date within weeks.

The oil price was continuing to climb as she spoke and financial markets have pushed up government borrowing costs, as they bet that central banks will be unable to cut interest rates much more in the face of rising inflation.

Lower gilt yields – or interest rates on government debt – were a key reason the forecasts for the public finances have improved since the budget. But these gains will be eroded if the dramatic market moves of recent days are sustained.

Reeves had hoped that after a series of missteps and U-turns, this would be the moment she could claim the credit for putting the UK on a more even keel – something she claimed was all the more important given the chaos overseas.

“With unfolding conflict in Iran and the Middle East, it is incumbent on me and on this government to chart a course through that uncertainty to secure our economy against shocks and protect families from the turbulence that we see beyond our borders,” she said.

She was able to point to the welcome fact that the OBR expects inflation, and public borrowing, to be lower than at the time of the November budget – and her much-vaunted “headroom” to be modestly higher.

Utility bills are set to fall in April as a result of the government’s intervention in November – shifting net zero subsidies into general taxation. And the public finances look healthier as a result of Reeves’s chunky tax rises during her first two budgets.

Yet if oil and gas prices remain elevated for a prolonged period, the OBR’s forecast – and Reeves’s determined calm – risks being thoroughly overtaken by events.

Former chancellor Jeremy Hunt stood up to warn Reeves that her repeated promises to reduce utility bills may “ring hollow” with the voters if they see their energy costs jump in the months ahead. Similarly, a renewed increase in wider inflation would strike at the heart of Labor’s claim to have tackled the cost of living crisis – even if the latest rise is not of their making.

Even if Donald Trump declares “mission accomplished”, the bombing stops, and energy prices obediently fall back to normal, the OBR’s forecasts point to more potential pitfalls ahead.

One is migration. The watchdog downgraded its growth forecasts modestly as a result of the weaker-than-expected net migration since the autumn, but has not yet taken into account Labour’s new, tough migration policies, which could put the brakes on growth.

And another is the significant increase in unemployment it now expects – back to its peak during the Covid pandemic.

Polling shared by Luke Tryl of the consultancy More in Common showed the public are far more aware of the jump in joblessness, which the OBR points out is concentrated among first-time workers, than lower inflation or interest rates.

Reeves could have delivered her reassuring message a week ago, and perhaps it might have been received as marking a calmer period for the UK economy after 18 months of turmoil – with the fillip of more rate cuts to follow. But if the bombs continue to fall, her promise of stability may quickly prove misplaced.