The long wait is almost over. On Wednesday, for the first time in more than 14 years, a Labour chancellor will have the chance to deliver a budget – and much is riding on what Rachel Reeves comes up with. After a series of unforced errors, the government needs to seize back control of the political narrative.
Reeves has said her budget will launch a new era of investment that will rank alongside Labour’s historic reform programmes of the past. She cannot afford the budget to be a dud.
There is no reason why it should be. Forget the idea that “wealth creators” are about to leave the country en masse because they may have to pay higher rates of capital gains or inheritance tax. Some could, but the vast majority will stay put. Ignore, too, suggestions that Reeves’s plans to borrow more for investment will lead to a ferocious sell-off of UK financial assets. The chances of another “Liz Truss moment” are remote.
That’s not to say Reeves has an easy job on her hands. The chancellor has pledged that there will be no return to austerity, and that requires an increase in public spending. She wants to keep the financial markets happy, so higher day-to-day spending means higher taxes.
Labour has ruled out raising taxes on working people, by which it means the rates of income tax, VAT, employees national insurance contributions and corporation tax. Together these account for about two-thirds of all tax raised, so raising the revenue to pay for the spending increases requires some ingenuity and some confusion over exactly who qualifies as a working person and who doesn’t. The biggest chunk of money will come from the national insurance contributions made by employers.
Finally, the chancellor wants to reverse the cuts to infrastructure spending, inherited from the last government, to boost the UK’s growth rate. Jeremy Hunt’s plans involved a fall in public investment from 2.4% to 1.7% of national output (gross domestic product) by 2028-29 – the equivalent of £24bn a year by the end of the current parliament.
This is therefore a budget that will raise spending, raise borrowing and raise taxes all at the same time. With growth slowing and consumer confidence dented by the chancellor’s repeated warnings about how draconian she intends to be, it could all go horribly wrong.
Yet despite the risks and the apparent contradictions, the strategy has a logic to it. Extra spending on the NHS, schools, local government and prisons can be justified by 14 years of neglect under the Tories. The tax increases to pay for higher spending can also be blamed on the Tories. Part of the budget is about wiping the slate clean.
The other part of the budget involves laying the foundations for future growth. Writing about the last Labour budget in his memoirs, Alistair Darling says: “A great deal of my speech was devoted to the need to improve our country’s infrastructure, including energy and transport. The case for government investment remains a strong one. There are areas in which, without government support, both financial and over important matters such as planning laws, we will fall further behind other countries.”
That was true back in 2010 and it is just as true today. The prolonged period of rock-bottom interest rates after the global financial crisis provided an opportunity for a succession of Conservative governments to borrow cheaply for investment. Sadly, that opportunity was squandered.
Reeves says plugging the hole in the public finances and investing for the future are two sides of the same story. The reason the NHS is creaking and the government is letting prisoners out on early release schemes is because economic growth has been weak for the past decade and a half, and even weaker once population growth is taken into account.
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Getting the economy to grow faster requires higher investment but Britain – as the International Monetary Fund noted last week – has lower rates of private and public capital spending than many of its peers. The chancellor thinks it makes sense to borrow to invest in transport and energy projects because this will lead to faster growth, higher tax revenues and the ability to spend more on public services. She is absolutely right about that.
Reeves said last week that she intends to make it easier for the government to borrow by changing the rules on public debt. Analysts estimate that her planned new measure – which takes into account the state’s financial assets and liabilities – could increase the scope to borrow by about £50bn.
In reality, Reeves will only use some of this additional headroom and may borrow only enough to avoid the £24bn cut to investment inherited from Hunt. In part this is due to concern over a market backlash but it is also due to the chancellor’s insistence that day-to-day government spending must be covered by tax receipts. Debt interest counts as day-to-day spending and – all other things remaining equal – the more the government borrows for investment the higher those interest payments will be.
In some respects Reeves has made life harder for herself. The recent slowdown in the economy is in part due to her overdoing the doom and gloom. Means-testing the winter fuel allowance for pensioners was a blunder that has cost her much public goodwill. Her message now that public investment is both good and necessary sits oddly with the decision in opposition to scale back the ambition of Labour’s green investment plan.
So this is a big moment for the government and for Reeves personally. Labour had a well-executed plan for gaining power. The budget needs to show increasingly sceptical voters that the party knows what to do with it.
