by TThe Treasury was ready when Labor came into office. In the week after the election landslide, ministers and a group of advisers appointed to serve at 1 Horse Guards Road were rounded up by officials and shown a 25-minute PowerPoint presentation that exposed the mess in the public finances.
There was no doubt among those present: this was an exercise to scare the new recruits. A shock session to make Labor aware of its responsibilities, and to ensure that Rachel Reeves prioritized fiscal prudence in her first budget.
It wasn’t hard for the chancellor to lean into the doom and gloom. Portraying the Conservatives as the party of budgetary irresponsibility was exactly the message Reeves wanted to convey after winning power, further aided by the Treasury analysis she commissioned which found a £22 billion “black hole” in the public finances demonstrated.
It is clear that the state of the treasury was in a shaky state. Deep tax cuts – introduced in a last-ditch effort to save Rishi Sunak – had been accompanied by “fiction” spending plans from the Tories, laying the groundwork for higher borrowing or renewed cuts. Debt as a share of the economy was on track to reach 100%, the highest level since the early 1960s.
But it didn’t ring entirely true either. Lucy Powell, the Leader of the House of Commons, was accused of exaggerating the risks to financial markets after warning of a possible “run on the pound” if the government had not immediately cut spending as it tackled budget pressures. brought light. However, there was little awareness of this in the City, following a stabilization of government bond yields, the exit from recession, inflation cooling and the Bank of England cutting interest rates.
In the past week, however, Labor has begun to move away from its previously gloomy message. Reeves hinted in her conference speech in Liverpool last week that she would relax the government’s self-imposed fiscal rules, finding more room for investment.
It was “time for the Treasury Department to move from just counting the costs of investments to recognizing the benefits,” she said.
Some of those who told Labor everything was fine now warned there was still a serious risk of market disruption if the chancellor moved the goalposts too far. So what is it?
The truth is that the balance lies somewhere between the two extremes. Somewhere between applying a George Osborne-style handbrake to the economy, and Liz Truss’ accelerator.
Jagjit Chadha, director of the National Institute of Economic and Social Research, says most investors are aware that fiscal rules are well past their sell-by date. “If you are clear about what you are going to do with what you have raised in terms of finances, and you have institutions that can deliver the right returns, the markets would not be afraid.
‘The gilded market is not some monster that will bite your hand off.
“We need to mature about where debt levels are, and show that this is where the country needs to be rebuilt, after a period of national degradation.”
One minister said they and their colleagues had become convinced of the need for action in recent weeks. “You have to persevere and do things quickly if you want voters to see progress.”
Although Reeves believes budgetary prudence is important, she knows that refusing to stimulate investment would also be an irresponsible act; by cutting back on things that can help boost growth and public finances in the future. This is the catch-22 that Britain has been dealing with for fifteen years, in a doomsday scenario that must be broken.
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Next month, Reeves prepares to focus on three main goals for her budget: protecting the incomes of working people; solving healthcare problems; and rebuilding Britain’s economic foundations.
The first task will be about increasing the resilience of family finances, as living standards have fallen lower at the end of the five-year term than at the beginning.
This means that we stick to a message of stability. The Chancellor believes that ‘hard’ decisions will be needed to balance everyday spending with tax revenues. She will say that stable inflation – which helps bring down mortgage rates – is one of the prizes available from a commitment to economic and fiscal prudence.
Reeves plans reforms to prioritize good jobs and paying decent wages, especially in parts of the country that need them most. This includes increasing investment and strengthening workers’ rights. But the Chancellor will face continued criticism for scrapping winter fuel payments for all but the poorest pensioners.
Second: solving the problems in healthcare. Here the chancellor will have to commit to spending increases and reforms. In addition to improving healthcare for the good of the nation, this priority is also an economic imperative; tackle record levels of long-term absenteeism, which are excluding working-age adults from the labor market.
Third: unlocking investments. This will be central to Reeves’ plan, as the key to stronger economic growth in the future. Here the Chancellor will prioritize Labour’s new investment institutions, GB Energy and the National Wealth Fund.
But she will also push for a change in the Treasury Department’s infamous vision, with a push to change the culture from a doom-laden budget department to one focused on economic growth.
If the Chancellor’s plans work, the reward will be higher living standards, paying decent wages and generating more revenue for the Treasury without having to increase a single tax rate.
