Whilst her chief jets off across the Atlantic to see if his new best pal can sort him out with a Manhattan penthouse, Rachel Reeves has a much more mundane task: writing the first Labour Budget for fourteen years. Gordon Brown has been popping into the Treasury to offer her a few tips.
With Labour’s conference having produced no discernible enthusiasm amongst the party faithful, let alone the wider electorate, this will be a prime opportunity for the Government to relaunch. That it already needs to is a sign of the (black)hole into which Reeves and Keir Starmer have fallen. From Number 10’s perspective, this Budget has been too long in the offing.
Unfortunately for Labour, every sign so far has been that the first Budget by a female Chancellor will be laced with doom and gloom. Even if ministers have realised that their talking down of Britain’s prospects has gone too far, we can expect tax hikes, spending cuts, and a continuation of the hairshirt approach to fiscal rectitude that they present to everyone but the unions.
Reeves’s strenuous denials that she is presiding over austerity 2.0 shows the desperation with which she wishes to avoid the allegation that she is just George Osborne with bob. But in the spirit of her predecessor-but-six, can the Chancellor pluck up an improbable rabbit to liven up her pitch?
Perhaps. According to The Times, she will “free up as much as £50 billion to spend on roads, housing, energy, and other large-scale projects”. She has “asked the Treasury to look at changing the Government’s current borrowing rules”. She hopes to gain “ a windfall to fulfil Labour’s pledge to increase investment.”
By shifting the terms of her sainted fiscal rules – a pledge to have debt falling as a share of the economy by the fifth year of a “forecast period”, copied from Jeremy Hunt – by changing the definition of debt, Reeves would be able to increase the amount of money she could borrow and spend.
At a stroke, she could cover the £15 billion needed for GB Energy and her National Wealth Fund, as well as have a few more to splash on the roads, rail links, and the A&E department of any jittery backbencher. Since she has pledged to fund day-to-day spending – not investment – out of tax, inheritance tax and capital gains will remain in her firing line next month.
The Treasury is said to be looking at a selection of options. One involves targeting “public sector net worth”, which involves debt being calculated as the difference between government assets and liabilities. Assets are not, now, considered. Another option involves excluding certain liabilities – like student loans – which could be eventually be realised. Cue raised eyebrow.
Calculations by the Institute for Fiscal Studies suggest that such a rule at the last Budget would have provided Hunt with around £50 billion extra in headroom. Just removing “policy banks” like GB Energy could alone produce £18 billion. The OECD and IMF are keen, encouraging Britain to take an investment approach that recognises its long-term benefits, as well as its short-term costs.
I’m a natural Negative Nancy. One of the reasons why I am a Tory is that when I hear something that sounds too good to be true, I assume it is. Freeing up billions to plough into our dilapidated public realm by fiddling with some wording sounds tremendous – a stonking two-fingered salute to the traditional limitations of Treasury brain. So where’s the catch?
It’s obvious. Even if Reeves succeeded in removing this spending from the headline debt figures, the debt interest payments incurred still must be met through tax receipts. We currently spend £103 billion on servicing our debt interest – 3.8 per cent of GDP, or 8.4 per cent of total government spending. Costs have surged since 2021 due to the spike in inflation and interest rate hike.
When we are already spending almost twice on debt interest as we are on defence. Adding more only eats up an ever-greater chunk of tax receipts. Further hikes become inevitable – especially if further borrowing forces interest rates back up. Treasury analysis last year suggested further borrowing of £25 billion could force the Bank of England’s rate up by up to 1.25 per cent.
With the mini-Budget a not-too-distant memory, gilt investors are wary of any government that hopes that debt could take the strain. The situation is less febrile than it was in 2022. But the markets are likely to treat any protest that more borrowing now means higher growth in the future as sceptically as they did Liz Truss’s claims that tax cuts today would mean growth tomorrow.
That doesn’t mean there isn’t need to invest in more roads, railways, or hospitals. Our looming demographic disaster makes it a necessity. But the road to doing that without applying more pressure to the public finances is the same as it has always been: cutting spending elsewhere whilst pushing through the foundational changes required to improve our long-term growth rate.
Reeves may get her definitional distortions past the OBR. But no Chancellor can fool the Gods of the Copybook Headings.
