The politics all looked simple for Rachel Reeves as she stepped over the threshold of the Treasury on 5 July to take up her post as Britain’s first female chancellor. The outgoing Conservative government had been routed at the general election and the idea was to blame the discredited Tories for the looming repair job on the public finances deemed essential by the new government.
As it turned out, things during Reeves’s first 100 days – a milestone she crosses on Saturday – proved to be not quite that simple. The chancellor duly rolled out phase 1 of her plan three weeks after the election when, after looking at the books, she said there was a £22bn hole that needed to be filled. Reeves expressed shock and anger at the evidence of fiscal incontinence that had come to light. The means testing of the winter fuel allowance was merely an early taste of the pain to be expected in the budget at the end of October, Reeves made clear.
But traditionally, newly elected governments don’t wait too long before announcing what they plan to do. Gordon Brown in 1997 and George Osborne in 2010 held their first budgets within weeks of being appointed chancellor.
The timing of the election and the need to run her decisions past the Office for Budget Responsibility mean Reeves’s first budget will take place almost four months after the election – and much has happened in that time. The OBR has warned that the tightening up of the rules governing non-doms may cost more in revenue than it raises. There has been a voter backlash against the winter fuel payments decision and a recognition that the doom and gloom message had been laid on a bit too thick.
As a result, there has been a shift in emphasis. The plan had been for the 30 October budget to be the moment when Labour pivoted from clearing up the mess they had inherited to a more positive vision of the faster-growing economy they were pledging to create.
In the end the shift came earlier. Amid evidence that consumer and business confidence had been hard hit by fears of budget tax increases, Reeves used her speech to Labour’s conference to promise that changes to the rules governing state borrowing would give her more scope to invest.
The good news for Reeves is that the economy is in reasonably good shape. Inflation is 2.2%, growth was a solid 0.5% in the second quarter of 2024, unemployment remains low and interest rates are on their way down.
The bad news is that the recovery in the first half of 2024 appears to be losing momentum. Growth figures for August showed the economy on course to expand by 0.2-0.3% in the third quarter of the year. The latest Recruitment and Employment Confederation jobs survey showed pay growth at a three-and-a-half-year low amid a drop in job vacancies, while the latest survey from the Institute of Directors showed already weak business confidence and investment intentions suffered fresh declines last month.
Anna Leach, the IoD chief economist, said its members cited “ongoing concerns over likely tax increases, the cost of workers’ rights, international competitiveness, broader cost pressures and the general outlook for UK economic growth”.
Amid widespread industry nervousness, Leach said business leaders were looking to next week’s global investment summit to reset the economic narrative.
The downbeat mood was underlined by a survey by the polling company Savanta that found almost three-quarters of companies expected their taxes to go up in the budget, one in seven said they would look to relocate elsewhere if business tax was increased and – for the first time since the election – more business leaders were pessimistic than optimistic about the impact of Labour on the economy.
Chris Hopkins, Savanta’s political research director, said: “There is clearly a real concern among UK business leaders about the autumn budget and what it will mean for them and their companies.”
Reeves is not the only cabinet minister to have faced a testing first 100 days. Sir Keir Starmer’s honeymoon has been cut short by the row over donations he accepted and by the infighting at 10 Downing Street that resulted in the departure of Sue Gray this week.
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But the budget provides an opportunity to get back on the front foot. As a result, there has been plenty of speculation – not discouraged by the Treasury – that Reeves will make it easier for herself to borrow for investment.
The chancellor now finds herself in the slightly uncomfortable position of trying to ride two horses at once: part the chancellor knocking the public finances back into shape, part the chancellor who sees the merit in investing in future growth.
Reeves sees no contradiction. In the budget she will make a distinction between the two types of public spending: current and capital. The aim is for tax receipts to cover the day-to-day costs of government, while changes to the way the government calculates debt will make it easier to borrow for infrastructure projects.
Reeves hopes her commitment to balancing the current budget will convince the markets that she is serious about financial discipline and that as a result they will cut her some slack when it comes to boosting public investment.
Judging by the rise in the cost of UK government borrowing over the past few weeks, the markets remain to be convinced. At the launch of the pre-budget assessment of the state of the public finances by the Institute for Fiscal Studies, the chief UK economist at Citi, Ben Nabarro, said there was a risk – albeit not a particularly strong one – of a run on UK gilts if Reeves went too far and too fast in ramping up public investment.
The yield, or interest rate, on 10-year bonds has climbed from 3.75% in mid-September to 4.2% this week. A number of factors lie behind the increase, but anxiety about the budget has been one of them. In the Treasury, memories of the bond market sell-off that followed Kwasi Kwarteng’s giveaway budget during Liz Truss’s seven-week premiership are still fresh.