She's desperate to be liked by the City. Jose Sarmento Matos/Bloomberg via Getty Images
The curse of finance ministers whose country’s business model is broken is that they are powerless to transform the economy, yet too powerful not to take the blame. But when the economy is merely stagnating, not yet in free-fall, preventing the descent into a financial crisis should require no more than average competence. Sadly, the evidence so far suggests that Rachel Reeves cannot even meet this low bar.
Seeking to combine the image of a radical reformer with the reputation of a safe pair of hands, Reeves began her litany of mixed messages before she moved into 11 Downing Street. While she acknowledged the “severe damage” inflicted by George Osborne’s austerity programme, she adopted his language to liken Britain to a person who had “maxed out the credit card”. Then, once in the Treasury, she demonstrated how using such language leads inexorably to a contractionary fiscal programme. Turning John Maynard Keynes’ dictum “Anything we can actually do, we can afford” into its opposite (“If we cannot afford it, we cannot do it”), Reeves embarked on an austerian downward spiral.
First came expenditure caps on caring for the elderly, which would save the measly amount of £1 billion annually. Having warmed up, she followed with the termination of winter-fuel payments for pensioners, shortly before one of recent history’s coldest winters. Along with cancellations of urgent hospital and railway works, these cuts saved another £5 billion, with a further £16 billion tax rises in the works. Then, in her autumn mini budget, Reeves broke her promise not to touch National Insurance Contributions by extracting an additional £25 billion from employers. Hoping to frame this final measure as pro-labour, her tactic fell terribly flat once workers realised they would be paying for most of it in the form of dampened wages.
By that stage, the new Chancellor was caught in the same doom cycle that typified Osborne’s tenure: each austerian measure meant to rein in the deficit boosted the borrowing requirement, spooked debt markets, elevated interest payments, reduced its fiscal space and caused the Chancellor to seek more austerian measures. These, in turn, deepened the economy’s stagnation. And so it would go on.
Tory critics have taken Reeves to task for being too ready to talk Britain down. But they seem to have forgotten that her claim of inheriting a £22 billion black hole from the Tories was a faithful imitation of Osborne’s strategy to blame his own austerity programme on the “scorched earth” situation he had inherited from Labour. The Tories have also accused her of being insufficiently austerian, which is disingenuous: if deeper austerity were the right remedy, why was the doom loop under Osborne just as bad? If anything, deeper cuts in expenditure today would only worsen Reeves’s predicament.
Obviously, the Tories are trying to exploit Reeves’s woes. But what is truly startling about her stewardship of the Treasury is both how faithfully she has stuck to Osborne’s playbook, and how similarly the UK economy has reacted. And this despite the quite monumental difference in the circumstances the two Chancellors faced as they took office. Soon after his appointment, Osborne received a windfall from the Bank of England — in total, £124 billion was transferred from the Bank of England to the Treasury between 2010 and 2020. In sharp contrast, Rachel Reeves will be sending to the Bank of England £34 billion of taxpayer money every year for the next four years. Essentially, all the money her austerity raises will be sent to the Bank. And all because of a flawed set of monetary rules which she is refusing to change.
This madness all dates back to the financial crash and the subsequent fallout when, in addition to the taxpayers’ bank bailouts and ultra-low interest rates, the Bank of England created £875 billion to buy government bonds from the bankers. It flushed the banks with cash that they would then hand out in loans to stressed households and firms. In the process, the Bank of England made money from the interest rate difference — between the ultra-low official interest rates it was paying banks and the higher interest accrued by the government bonds. Hence the £124 billion windfall for the Treasury.
However, the situation was reversed after 2022. With the pandemic disrupting supply chains and triggering inflation, the Bank raised interest rates tenfold and began selling the government bonds back to the bankers in the hope that prices would stop rising. But bonds come with fixed interest rates. And by raising interest rates, the Bank of England had effectively pushed down the value of the older bonds it was selling off, thus inflicting large losses on itself.
These losses could have been avoided in two simple ways, reflecting the wiser practices of other major central banks. First, it could refrain from selling government bonds at knockdown prices — and instead hold them to maturity. Second, it needn’t pay bankers the high official interest rate on every pound they choose to hoard at the central bank.
Indeed, many leading central banks pay the bankers the going interest rate only for part of their deposits, the rest at zero. This is precisely how the European Central Bank (which, by the way, no one can accuse me of being a lackey of) avoided major losses when deflation gave way to inflation. There are no good arguments for why the Bank of England should not follow the ECB’s example — except that the City bankers would not like it. And only a cowardly Chancellor would think this was a good enough reason to maintain a £34-billion subsidy for the banking sector every year.
Given the Bank is supposedly independent, some may ask whether Rachel Reeves is really to blame. But the issues at stake are in the remit of Parliament: the mindless fire sale of government bonds; the high interest accrued to bankers’ money; and, most crucially, the assumption, first promised by Philip Hammond, that the taxpayer would indemnify the Bank of England for whatever losses it might suffer. These fall under the Chancellor’s responsibility. And given that it is her duty to legislate for the common good, she could change them.
Just look at Reeves’s predecessors. Before Philip Hammond’s promises, George Osborne and Alistair Darling legislated that the Bank of England could print money for the bankers but not for households — against the advice of the not-exactly-Leftist IMF. And now Rachel Reeves has decided not to legislate away the stealthy BoE subsidy to the bankers, adopting instead their inane, self-evidently self-serving arguments. Chancellors, in short, cannot hide their responsibility behind a distortion of the notion of central bank independence.
Taking a broader perspective, ever since Margaret Thatcher vandalised Britain’s ailing heavy industry and replaced it with a vicious financial system, it was only a matter of time before a global financial crisis would bring Britain to its knees. Following the 2008 crash, overgenerous money printing for the bankers and austerity for everyone else trapped the UK into a low-wage, low-productivity, low-growth, low-take-home-pay, low-rent equilibrium. That is why, for a while now, Britain has felt like an advanced rentier society that has run out of rents.
But let’s be honest. Labour was never going to fix Britain’s broken business model. Nothing in their manifesto warranted any such hope. Nevertheless, it isn’t too much to expect minimal levels of competence and enough courage from a new Chancellor to rescind an annual handout of £34 billion to bankers already flash with taxpayer cash. Alas, overpowered by an urge to be accepted by the City, Blackrock and the Davos crowd, Reeves has fallen into a trap of her own making.
John Kenneth Galbraith once quipped that “[t]he process by which money is created is so simple that the mind is repelled”. Today, it is hard not to be repelled by how Britain’s scarce fiscal resources are sacrificed on the altar of the Chancellor’s cravenness.
Yanis Varoufakis is an economist and former Greek Minister of Finance. He is the author of several best-selling books, most recently Another Now: Dispatches from an Alternative Present.
yanisvaroufakis 
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeWell , I have a degree in economics and am a qualified accountant. And I didnt understand that.
Now I know I am thick and slow – but could the author please explain that more clearly.
I have no doubt he is right, any chancellor with an untruthful CV is clearly stupid because they are bound to be found out . So I dont need convincing on that score. It’s the financial mechanics I didnt follow.
Wherever one looks we cannot escape the Davos man on his way to 2030 and the Great Reset. Reeves merely a pawn on their chess board.
What I can’t understand is why she – and her successor – could understand anything about life in Britain. They have no experience of anything, just theories.
Beware of Greeks and all that, but be especially so if they come with a big baggage of closed society negative ideologies Does this guy not realise that winter is only halfway done in UK – unless ofc he has some super pre-cognition power that has been hithertoo absent? Reeves is a clown – just the sort of person who could end up running the financial ministry of a failed state – eg Greece, Italy, and likely UK in short order. I think the gilt traders are playing her but also now its come out she faked her experience/credentials i expect there’s well founded fear of what she may do. The financial systems and the govts of the world are a kind of team.There’s a quite rational effect when a cheater or chancer is found in a team, people tend to turn on them, often insadness but more likely in anger – no-one likes to be conned and that in effect is what starmer has done appointing reeves and she in turn carried on the deceit when she accepted the job.
“Having warmed up, she followed with the termination of winter-fuel payments for pensioners”
The Treasury had been urging successive Chancellors to do that for ages. Indeed, it would appear that Rachel Reeves is perfectly aware of her own inadequacies and has followed advice from Treasure Mandarins, the Bank of England and other advisors to the letter. That is why there is so little kickback compared to when Liz Truss tried to cut across Treasury doctrine.
What this worryingly shows is not that we have a sub-par Chancellor, but that those advisors and officials who are supposed to know what they are doing – do not!
Well Yanis
The bankers appear to have sorted out your basket case of a country no thanks to you.
Also there was no austerity under Osbourne he just reigned in the profligacy a bit.
Don’t suppose it ever crossed your mind that you might actually be wrong.
The last time Labour hiked a tax, income tax from 40% to 50% it generated little if no extra revenue, and arguably saw a decline in tax revenues. With the apparently unforseen (by Reeves and the Treasury) consequences of this one – all the private companies, GPs, charities etc servicing the public sector either passing on the cost rise or cutting back on staff, plus the fallout in hospitality, retail etc I would not be surprised to find the measure raising only a fraction of the Government’s forecast.
At one time I would have found it surprisng that Labour would put low paid staff in the firing line of their policies, but this seems to fit the pattern, as seen with the winter fuel allowance, of hit the vulnerable first and avoid impacts on affluent Guardian readers.
Instead of reducing the NI threshold, so nearly doubling the NI cost of someone on the minimum wage, they could have put an increased rate of say 25% on wages of over £100,000. However this would disproportionately impact the likes of Goldman Sachs, Deloittes, Google, Microsoft and others who advise the Government so I can see why such a measure was not taken.
The usual Varoufakis nonsense kicking off from assumptions that are never justified. In this case the claim that Britain’s “business model” is in some unspecified way “broken”. Not forgetting the obligatory “false memory” (I’ll be generous here) of Thatcher “vandalising heavy industry”.
How about this Yanis: perhaps the UK “business model” isn’t that bad at all, but being implemented poorly, not least by interfering and incompetent governments (not limited to the present one) ?
I suggest also that the UK’s resources – both financial and otherwise – are not at all as “scarce” as he wishes to make out. Just being poorly used and wrongly allocated.
There’s a reason this guy is an ex-finance minister.
Austerity? You’re having a laugh aren’t you? Have you seen the levels of taxation, borrowing and spending we are subjected to? These Marxists are a massive joke.
It’s simpler than that. All they can do in office, happy that the main decisions are made elsewhere, is give away money and persecute indigenous British. They have a particular loathing for the private sector. The favoured areas for Labour vote are public sector, welfare and the religious conservatives. Everything is targeted to growing nothing other than that vote, apart from the pensioners (see above) and retaining power.
For the rest of us it’s a wearing down process. ‘Tis the Fabian way.
“[t]he process by which money is created is so simple that the mind is repelled”
Indeed, but one has to do some work to add value to a product and so create wealth. But these days, in the UK, it is financially viable to do no work at all. And should anybody be so minded as to call themselves an entrepreneur and actually try to do some work, they are ‘repelled’ by over-burdensome regulation and by the prevailing attitude that any return for that work should be redistributed for the ‘social good’.
Reeves, Hunt, Hammond, Osbourne.
Reeves is clearly the most dim, but the problem is that they have all towed the Treasury line. They tax big. Spend big. Regulate heavily. They do what Gordon Brown, who heavily politicised the Treasury, put them there to do
What I don’t understand about the anti-‘austerity’ crew is what the alternative would be. Given the primacy of the bond market (which Reeves is experiencing today), if Osbourne had not cut spending, when Covid came along we would have had far less ability to respond in a super-Keynesian deficit-financed way. At some stage the kindness of strangers wears thin and so even socialists like Reeves will end up (soon, I expect) making cuts, i.e. implementing austerity. As ever with Mr Varoufakis there is some very interesting stuff here – the idea of the Bank of England paying the bankers the going interest rate only for part of their deposits, the rest at zero being one. Was that not in the Reform UK election manifesto? Maybe I dreamed that.
Well Reeves is clearly in trouble when Left Wing leading minds ( sic) begin to openly criticise her works and denigrate her intelligence. Mind you, if she did follow any of this guys pearls of wisdom, she would be even deeper in the doo doo. And she’s already up to her neck n it.
And yet Osborne talked ‘up’ austerity to stabilise the financial markets, but actually cut little.
I see the reply feature is disabled – one comment below references the davos men and their “reset”. Well i am sure they’ll try – but don’t hold your breath. As i have said often 25% of the worlds estimated $400 trillion assets are held in stock markets or other financial vehicles – the rest are other assets, often physical. Exactly how is davos man going to get his paws on these assets. I am sure he could rob Stavros the kebab van man but i doubt Putin, MBS or the leaders of the Sinoloa Cartel are losing sleep over his threats. An example showing the impotence of ideology follows: A young motorcycle enthusiast called Yanis wanted his notoriously extractive and criminalised society to be more equal. He though if he could destroy the economy men of fighting age would revolt and create the justice for all Utopia he set his sights on. Then he was stopped, by the Germans with a little help from an Italian – though the latter didn’t stay the course. 1940s all over again eh?
“… the mindless fire sale of government bonds”. Announced by the Bank the day before Truss’s mini-Budget. A complete coincidence, of course.
Oh, and by the way, Osborne talked a lot about austerity to reassure the markets but Government spending actually went up in real terms every year. That’s not my definition of austerity.
The one very sensible suggestion from this article is about us not overpaying interest to the BoE. Richard Tice has been banging on about this for almost a year. Vote Reform!
Oh dear! What a mess.
Full disclosure: I am biased for Yanis. He is one of my fav in terms of world financial economy!
Not withstanding my bias; however, Britain’s current approach—shuffling money between the Treasury, the Bank of England, and financial institutions—has no long-term future. The illusion that financial markets alone can sustain economic growth is collapsing, and the cracks are showing. As interest rates rise and bond markets tighten, Britain faces a moment of reckoning: either it rebuilds its productive economy, or it resigns itself to perpetual stagnation and decline.
The real debate should not be about austerity vs. spending or Osborne vs. Reeves. It should be about why Britain remains dependent on financial gimmicks rather than real economic strength. Until that conversation happens, all Chancellors—Reeves included—are simply rearranging deck chairs on a sinking ship.
Oh come off it Yanis, Osbornes Austerity was a walk in the park. But I do remember your Oxford University lecture when you talked of You and your Prime Minister being summoned to the ECB for you and Country to be be castrated. It really gets my goat when the Left here complain ad infinitum about Austerity. What the Greeks suffered was Austerity regardless of whether of it was their own fault.
She’s a woman and therefore difficult, but not impossible, to get rid of on grounds of gross incompetence. I’m just grateful that she’s white and heterosexual otherwise the economic outlook would be very grim indeed.
This all goes to show that our political class could not negotiate their way out of a body bag. And they are in charge folks!
Hold on a second there.
Osborne austerity? Spending grew in real terms in every single one of Osborne’s years! That was NOT austerity.
The austerity that is truly needed is benefits austerity and that is now baked in, whatever you say. The simple and rather bitter situation is that the Welfare State has run out of welfare. You can’t just wish it out of thin air.
There’s nothing our Rach can now do. She’s blown her chances. There’s no way back.
Let’s have a one off wealth tax. Calculate the percent needed to put things in order. There’s no avoiding a one off tax.
The issue is less the Chancellor – Reeves is clearly out of her depth – but the Treasury, which will define policy for taxation, public expenditure and investment, irrespective of which party is in government, and which individual holds the role of Chancellor – and who probably needs to endure powerpoint after interminable Treasury powerpoint from one dry day to another. Most of the Treasury staff are well-meaning of course, but that is part of the problem – the UK is unlikely ever to implement the radical reforms that will bring meaningful change, nor take advantage of the opportunities offered by Brexit.