After the cabinet reshuffle, how about an economic reboot too?

The success of these appointments will hinge on whether they can provide the prime minister with the confidence to stand behind his chancellor as she makes difficult decisions. Over the summer, Starmer didn’t support Rachel Reeves on what were, in public spending terms, modest welfare reforms. It left Reeves in office, but not in power. That cannot continue.

Each difficult decision in the run-up to the budget on November 26 will require co-ordination across UK institutions, political courage in confronting uncomfortable truths, and an honesty that will convince the UK’s creditors that its economic strategy is not simply a holding pattern of rising debt and sluggish productivity until the next political cycle. At present the cost of UK government debt is persistently the highest in the G7. This is financial markets telling the government they are uncomfortable over the outlook for inflation, uneasy at the debt trajectory and doubtful that economic growth will ride to the rescue.

I would suggest that there are three areas to focus on to avoid financial markets tightening the noose further on a heavily indebted UK economy. The first of these is better co-ordination between the Treasury and the Bank of England on the latter’s sales of government debt. The current approach — the Bank’s programme of active quantitative tightening (QT) — is widely seen as unnecessarily costly and distortive. Investors understand the need to shrink the Bank’s balance sheet, as all major central banks are doing. What they question is the wisdom of doing so in a way that competes with the Debt Management Office for the same pool of buyers, at a time when demand for gilts from UK pension funds is going through a rapid transition.

The market expects the Bank to reduce its pace of gilt sales from £100 billion a year to £75 billion a year over the next 12 months — a decision set to be announced on September 18. That figure hangs over City trading desks like a storm cloud. If the Bank of England pared back this envelope — say, by relying purely on passive roll-off of maturing gilts, which would bring sales closer to £50 billion — this would ease market indigestion. An even bolder option would be to limit active sales to just £25 billion and allow reinvestments to drift toward buying longer-duration debt, where funding pressure is currently at its most acute. America is doing something similar under the stewardship Scott Bessent, the US Treasury secretary.

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Clear co-ordination — publicly messaged and jointly defended — would reduce the sense of institutional cross-purposes. The former prime minister Liz Truss may, with some validity, shout “conspiracy” and question why such support was not in place in 2022. She is correct that when Bank and Treasury co-ordination breaks down, taxpayers are the ones that suffer.

And it is on the subject of inflation that the second focus must lie. Any action from the Bank on gilt sales must be supported by a Treasury that takes far more responsibility for controlling inflation. Simply cutting gilt supply indigestion in isolation would amplify fears of fiscal dominance — that is, the suspicion that monetary policy will be bent around the government’s financing needs.

The government needs to make clear that it is not leaving the Bank to fight inflation alone. This is essential if institutional credibility is not to be further eroded. Specifically, ministers need to recognise that many of the drivers of the UK’s sticky inflation over the past year have not been global in origin but home-grown. The interaction of higher national insurance contributions, rapid increases in the national living wage, and the pensions triple lock — as well as a suite of regulated price rises in key utilities and transport services — has created a cycle where costs imposed on businesses quickly pass through into consumer prices.

If the government wants to break this dynamic, it must be relentless in bearing down on employment “on-costs” and set in train a re-examination of the pensions triple lock. The recently revived Pensions Commission should have its scope expanded to explore this policy, in what would be a powerful message to markets. No bipartisan route to reviewing the triple lock looks possible without it.

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By signalling that it understands the inflationary pass-through of its own tax and pension policies — and that it will act to mitigate them — the Treasury can reassure markets that the fight against inflation is genuinely a joint endeavour. That is a quite different message from the one currently received, which is that fiscal policy will keep loading costs on to the private sector, leaving the Bank with no choice but to keep rates higher for longer.

The third and final lever is perhaps the most politically charged, but also the most important for the UK’s long-term productivity outlook: energy policy. No serious investor believes the oft-repeated government line that there is no trade-off between net zero and growth. Pretending otherwise merely undermines credibility.

If the government wishes to convince creditors that growth is its overriding mission, it must embrace energy pluralism. That means signalling openness to a broader mix of energy generation, accelerated investment in grid capacity, and a recognition that abundant, reliable, and affordable energy is one of the foundation stones of productivity growth. Investors want to see a UK energy strategy that pursues energy production in all its forms, and for those to be integrated into a wider productivity plan.

Delivered together — by both the prime minister and the chancellor — this package would represent a credible economic reset. It would demonstrate that fiscal, monetary and energy policy are not being run on parallel tracks but are aligned in pursuit of stability and growth rather than ideology. Only with that coherence is there a chance that the UK’s broader supply-side reforms and capital spending programmes — areas where this government deserves more credit — will make their intended impact.
Markets can forgive temporary missteps. They are less forgiving when they sense policy incoherence.

f Britain repeats the mistake of underestimating the cumulative effect of its own policies — on borrowing, on inflation, on productivity — then it risks reliving the volatility of three years ago. That would be the worst possible backdrop for a budget already hemmed in by weak growth and rising spending pressures.

Simon French is managing director and chief economist at Panmure Liberum