Rachel Reeves is preparing to throw the kitchen sink at the Conservatives. To howls of predictable outrage from the opposition benches, the chancellor will tell the Commons on Monday that Labour’s inheritance is far worse than anyone could have imagined, backed up by a Treasury audit showing £20bn in spending commitments left unaccounted for by the previous government.
Despite the old Tory promise to “fix the roof when the sun is shining”, made way back in 2010, it has been clear for years that nothing of the sort happened. Reeves can hardly feign shock that the national debt is at the highest level since the 1960s, public services are crumbling and living standards have gone backwards.
For several years it has been clear the Tories were engaged in one of the most elaborate works of fiscal fiction ever penned, by glossing over mounting spending challenges – from a failing NHS to collapsing school buildings – in favour of promoting fantasy tax cuts. Time was always going to catch up with the cowboy builders, cutting corners with their botched roof mending, leaving Britain wringing wet.
Since the general election, Jeremy Hunt has admitted he wouldn’t have had scope to cut taxes this autumn, sharply contrasting with Rishi Sunak’s promises of a low-tax nirvana made only weeks earlier. Most people knew the pledges were pure bunkum anyway, desperately peddled to voters who cared more about seeing a doctor than proving the Laffer curve.
Instead, Reeves’ spending audit this week is widely viewed as the chancellor paving the way for a tax-raising autumn budget. “Nothing in our manifesto is going to require us to raise taxes,” Keir Starmer had told voters. But what about in the inheritance left by the Tories?
The opposition will cry duplicity. But the case for action is clear given the mess public services have been left in. Most voters were resigned to higher taxes whoever won the election, and many would welcome increases to speed the repair job.
The chancellor will also make the case that most people will be protected by manifesto promises not to raise income tax, national insurance or VAT, which bring in the majority of revenue for the exchequer. Another big earner – corporation tax – is also off limits.
Money could be found from raising taxes on capital gains, inheritances and closing pensions loopholes – measures Labour quietly explored before 4 July. On Sunday the Resolution Foundation thinktank suggested putting up these levies could plug up to half of the £20bn fiscal hole. Reeves could also say such rises wouldn’t break a promise not to increase taxes on “working people” because it would primarily target passive income.
The former Bank of England rate setter Michael Saunders reckons such a move could raise up to £25bn, with the bulk from aligning capital gains tax rates with the higher rates of income tax. However, full equalisation is something the chancellor has previously ruled out, fearing it could undermine investment in Britain.
Over the weekend it was widely reported that Reeves would instead look to cancel or delay big infrastructure projects such as the building of new roads and hospitals, arguing she has inherited “unfunded” and unrealistic schemes.
Yet after securing such a thumping majority, Labour could be far bolder to ensure tangible economic progress before 2029.
Part of Reeves’ caution is rooted in a desire to maintain her “iron chancellor” image, drawing contrast with Liz Truss’s reckless approach. This was politically astute before the election, helping to assuage voters’ concerns about Labour that have lingered since the 2008 financial crisis.
But the time has come to move on from the fiscal rule imposed by the previous Conservative government, which Reeves has stuck to so far, requiring the national debt to be falling as a share of GDP in the fifth year of forecasts.
It isn’t as though this would be without precedent. The Tories changed the fiscal rules seven times since 2010 – the shortest lifespan out of 35 advanced economies – to suit political needs, and were only meeting the current ones with fantasy spending assumptions.
Growing numbers of top economists see the current rule as an albatross holding Britain back, including the former Bank of England chief economist Andy Haldane and the director of the National Institute of Economic and Social Research, Jagjit Chadha.
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Some are concerned that borrowing with abandon would anger the City gods, risking a repeat of the mini financial crisis triggered by Truss’s not-so-mini budget. But much also depends on circumstances.
Britain still confronts an awkward reality of high levels of national debt and lacklustre economic growth. But Starmer’s administration has significantly more goodwill with the money-changers than Truss’s wrecking mob, having returned a sense of grownup government to Britain.
The City not only hated Truss’s disregard for the Bank of England, Treasury, Office for Budget Responsibility and the International Monetary Fund. Its top economists knew her £45bn of tax cuts for the rich would have no meaningful impact on growth, seeing it instead as costly inequality-stoking ideology.
Should Labour wish to borrow to fix public services and boost investment in productivity-enhancing infrastructure, it is more than likely the City would take a different view. Most economists know the UK’s biggest problems are with its diminished supply capacity. Borrowing today to support growth tomorrow would therefore be welcomed.
For starters, Reeves could change the fiscal rules to exclude losses on the Bank’s quantitative easing programme, which Barclays estimates could add £20bn to the government’s headroom.
However, the Niesr thinktank proposes a more comprehensive rethink, including reforms to discount public investment from the current targets – helping to pave the way for more spending on transport, housing and the transition to net zero.
Earlier this year the chancellor showed some acknowledgment that change was required, using her Mais lecture to say she would get the OBR to report on the long-term benefits of capital spending decisions, helping to make the case for borrowing to invest.
But the chancellor should go further. Sticking to an arbitrary straitjacket is unnecessary and could throttle the kind of investment on which stronger economic growth and higher living standards depend.