Andrew Sissons and John Springford, 9th April 2026
In her second Mais lecture, Rachel Reeves set out the clearest articulation yet of her approach to economic growth. She also put her strategy in the context of the crisis over the Strait of Hormuz, the most serious economic shock the Labour government has so far faced. It was an impressive, coherent speech by an often underestimated chancellor, setting out a theory of growth and economic security for troubled times.
But does the speech – and the government’s approach – go far enough? At a time when global economic conditions are clearly worsening, because of supply shocks and geopolitical risks, is the UK government doing everything it can to protect and nurture the UK economy?
In this piece, we argue that, while it is coherent and gets many things right, the Chancellor’s growth strategy is undermined by her government’s self-imposed red lines: on Europe, migration and on broad-based tax rises. Unless the government reconsiders these damaging constraints it has put on itself, it will struggle to deliver Reeves’ vision or to steward the UK economy through one of its most challenging periods.
What is Reeves’ theory of growth?
Reeves set out the case for an “active and strategic state”, which has three priorities: stability, investment and reform. The first two of these, stability and investment – which she dubs ‘securonomics’ – are largely functions of her fiscal policy. She argued that she has raised taxes and made it easier for the government to borrow to invest, via changes to her fiscal rules. Her final priority, reform, was the most interesting part of her speech, stitching together several different parts of the government’s policy approach.
There was planning reform, aiming to speed up building of homes and infrastructure, which this government sees as a broadly deregulatory agenda. There was energy, in which the government is already driving a large amount of investment, and is now trying to speed up delivery on nuclear (deregulation again) and subsidising parts of energy bills (more interventionist). There was capital, with Reeves hoping regulatory reforms will direct more capital towards productive businesses. And most interestingly, there was labour, where Reeves made it fairly explicit that her policy is to raise the cost of labour to try and force businesses to invest more in capital.
To this list, which helped to clarify much of Reeves’ strategy to date, she added three new priorities in her Mais Lecture. First, she set out a big increase in public investment in second-tier cities, headlined by a new “roadmap” for fiscal devolution for the mayors of major city regions. Second, she confirmed a more active approach to building up the UK’s AI industry, emphasising the new Sovereign AI unit. And third, she outlined a policy to align more closely with the EU where it helps the economy, while ruling out any return of freedom of movement.
Taken together, this feels like a coherent and original – although not revolutionary – theory of how to grow the UK economy in the medium term and beyond. Drive more investment in capital through a combination of direct state action and removing barriers. Make labour more expensive to raise wages and productivity and further incentivise capital investment. Turn the UK’s second-tier cities outside London into driving forces of the economy. And deliver economic security through a mix of prudent macro policy, increased defence spending, home grown energy and economic integration with our closest allies.
Is this a good theory of growth? Is it enough?
Is this a good theory of economic growth and security? Taking the broad thrust of the policies, yes. The UK’s route to growth, as we set out in our essay Getting Britain out of the hole, is openness to trade, migration, reshaping cities, completing the energy transition, more effective regulation and competition policy. Reeves’ speech touches on most of these themes, and on some of them it is strong. The new announcements on investing in and devolving fiscal powers to city regions stand out as crucial and very welcome interventions, as long as the fiscal devolution is accompanied by devolved decision-making, especially on adult social care.
But there are significant gaps in the speech and in the government’s approach to growth, which are enough to undermine it. At root, Reeves’ approach does not pay enough attention to expanding the UK’s supply capacity.
We don’t know yet how bad the Hormuz-induced stagflation will be – at the time of writing, the worst case scenario of a long term closure of the strait looks like it might be avoided. But it is the latest in a series of supply shocks – Brexit, Covid, the Ukraine energy crisis – that we can expect to keep coming. Rising authoritarianism and populism, alongside fading US dominance, is making war more likely and raising barriers to trade and migration. The high level of global integration means that shocks cascade through the international economy more quickly, and provides Britain’s adversaries with chokeholds they can use as leverage. Climate change will add to supply problems, causing flooding and drought that will inhibit production.
The government needs a more expansive policy to raise the supply capacity of the economy and allow it to adjust more quickly to shocks. And the persistence of interest rates and inflation in the UK are telling us that, macroeconomically speaking, aggregate supply growth is too slow, and the economy is not flexible enough. It might seem contradictory that openness to trade and migration can help with economic security when the global order is fraying, but it will make the British economy more adaptable.
Trade and migration – Britain is closed when it needs to be open
In the current climate, trade and migration policy need to be set to expansion mode. Instead, the UK government’s efforts to restrict migration and its red lines on freedom of movement with Europe are contractionary policies which reverberate across the rest of the government’s growth agenda.
Reeves is right to seek closer integration with the EU – especially important in a world of Trump and supply chain shocks. The US is a less reliable trade partner. The UK suffered acute import problems during the Brexit process that have eased – although its imports from the EU continue to be lower than peer European economies. There are security risks from too much dependence on Chinese goods, especially in green tech. As a result, substantial reintegration with the EU economy is growing in importance. But her policy of further, sector-by-sector integration with the EU is undermined by the government’s red lines on no customs union, single market or freedom of movement. In practice, there is very little scope for further integration without accepting freedom of movement – Europe is simply not interested in going further. As we argued in our essay, the impact of freedom of movement on Britain is likely to be smaller than before 2016, and the economic payoff to accepting it would be large.
The Home Office is also inhibiting growth more widely with its immigration crackdown. Skilled worker visas have fallen rapidly as salary and skilled worker thresholds have been raised, and net migration is set to fall to levels not seen since the early 1990s – and possibly to go negative. Plans to raise the period after which immigrants can receive indefinite leave to remain – to 10-20 years for most – would tie people to employers without the chance of progression, and extract huge visa and healthcare charges. This will make Britain even more unattractive to workers it needs.
Britain’s universities, one of its strongest export sectors and anchors for so many local economies, are in financial distress caused in part by a crackdown on overseas students (or “exports”, to give their tuition fees and living expenses another name). The NHS and care sectors are likely to face staff shortages due to immigration restrictions, which could have a knock-on impact on the broader labour market.
The Home Office may also create problems for the government’s other priorities, such as investment in energy and housing: while immigrants raise the demand for public services, infrastructure and houses, they are also crucial to the supply of it. With the British workforce set to shrink in the absence of immigration of 100,000 a year, and the continuing shift of British workers into professional occupations, it is important to ensure public services and construction have the frontline workers they need. In short, Britain needs more working age people at a time like this, and it risks tipping into zero or negative net migration at the worst possible moment.
Tax red lines – creating distortion and underfunding the state
The second major problem is the government’s red lines on raising taxes. Labour’s 2024 manifesto ruled out increasing the headline rates of income tax, employee national insurance and VAT. This pledge has been retained through the discovery of the £22 billion ‘black hole’, Trump’s tariffs and now the Gulf energy crisis.
The pledge has been extremely damaging to the government, because it has prevented it funding many parts of the state properly, and because it has caused the Chancellor to look for a range of other, more damaging tax rises. The Chancellor has raised taxes on employers (via employer National Insurance contributions) and on workers (via fiscal drag to tax thresholds). Her approach has also created widespread speculation about a wide range of distortionary tax changes. Most of these have not been introduced, but the speculation may have been damaging in its own right.
As we set out in our essay, the government needs to rebuild some key aspects of state capacity – particularly in regulators and local government – and it needs to raise and reform taxes. Measures such as folding NICs into income tax, dealing with lumpy and high marginal rates, raising and reforming CGT to include an inflation allowance, and property tax reform are needed if the UK is to return to fiscal stability and growth. The government’s red lines on tax make these reforms impossible. Given rising geopolitical risks, and the possibility of additional fiscal pain, now is the time for those red lines to go.
Good idea, bad timing – raising labour costs in a recessionary environment
The third key problem is one of timing: the Chancellor has raised the cost of labour at a moment where both inflation and rising unemployment look likely. The policy of raising labour costs to stimulate more investment may have been a good one between 2012 and 2021, when Britain had very low interest rates, weak demand and strong employment, or in 2022 to 2023 when labour markets were running extremely hot. It is less obviously a good idea in the current climate which has an increasingly stagflationary look to it.
Since 2024, inflation has remained persistently high in the UK – and is likely to be driven higher by energy costs – while unemployment has begun to rise gradually. Youth unemployment in particular has been creeping up, recently passing 750,000 among 16-24 year olds. This is a worrying sign, both because youth unemployment tends to act as a “canary in the coal mine” for labour market pain, and because youth unemployment is especially damaging to people’s long term career prospects.
A world of increased shocks (energy, climate, geopolitical) is also not a place for increased labour market frictions. During supply shocks, economies adjust by switching labour, capital and land use when relative prices of products change.
Higher energy costs, for example, should result in a shift in employment from more to less energy-intensive industries. Labour should shift more rapidly from installing gas boilers to heat pumps for instance. Adding costs to labour, increasing protections for employees and propping up struggling industries inhibits those shifts, and could have damaging long term economic consequences. Another energy price guarantee would be better spent on subsidy for energy saving equipment to hasten the transition from fossil fuels.
The Chancellor should look again at market frictions and employment costs, both for macroeconomic and supply side reasons. Along with the tax reforms outlined above, she should be seeking to reduce the costs of labour, at least in the short term.
Conclusion – Reeves can still be a reforming Chancellor
As her Mais lecture showed, Rachel Reeves has plenty of good economic ideas, although she faces some of the most difficult economic conditions of any Chancellor. Despite the challenges, there is still time for her to usher in a new economic model, with private sector output spread more widely across Britain’s cities, less congestion, more secure energy and imports, stronger employment growth, higher tax revenues. But the government must adjust to the straitened times, and its damaging red lines – on migration and tax – have got to go. Until they do, there is a limit to what any economic strategy can do.
