You think that the public finances are in a bad way? Tomorrow (Monday) Rachel Reeves will come to parliament to tell you different. No, the chancellor will say, adopting the shocked-and-appalled tone that she has perfected. After a rummage through the skeletons in the Treasury’s cupboard, she will declare that what she has discovered is not merely bad, it is diabolical. Her statement asserting that the Tories left Britain broke will be followed by a news conference to hammer home the same message. This will come just before the Commons departs for its summer break. Do not expect sunshine from the chancellor. She will be thunderous. The volume will be turned up to deafening on the “things are even worse than we thought” mantra which she has been blasting out from the day she arrived at Number 11.
One reason she will do this will be in pursuit of the strategy, which I described a fortnight ago (https://www.theguardian.com/commentisfree/article/2024/jul/14/why-labour-wants-to-hang-the-tory-legacy-around-the-conservatives-necks-for-years) , of superglueing culpability for their legacy on to the Conservatives and doing so at a time when they are too numbed by their election defeat to mount much of a counter-narrative. She will also lay it on thick because it is hard to fault her contention that there was abysmal financial mismanagement by the Tories and it became more dreadful towards their end. To try to keep his show on the road, Rishi Sunak resorted to raiding the contingency reserve and making significant funding commitments without knowing where the money was supposed to come from. Rather than grasp difficult decisions, the previous government sat on them in the hope that they would go away (they haven’t) or become Labour’s problem (they have). This decision-dodging was especially true of anything that came with a big price tag, such as whether or not to accept the recommendations on public sector pay from the independent review bodies. The recommendation is for 514,00 teachers and 1.3 million NHS staff to get a 5.5% pay rise. (https://www.theguardian.com/society/article/2024/jul/20/pay-bodies-to-recommend-rise-for-teachers-and-nhs-staff-report-says) The Conservatives failed to make proper provision for this and the Treasury will need to find around £5 billion if it is to meet the bill. Ms Reeves has indicated that she would like to on the grounds that there is “a cost” to rejecting the recommendations. (https://www.theguardian.com/politics/article/2024/jul/21/reeves-hints-public-sector-workers-could-get-above-inflation-pay-rises) Sure could be. Strikes by teachers and in the NHS would surely curtail Labour’s time in the honeymoon suite. Replicated across the public sector, this level of pay increase would bring the total hit to the exchequer to around £10 billion. (https://www.theguardian.com/society/article/2024/jul/26/millions-of-uk-public-sector-workers-set-for-above-inflation-pay-rise)
That’s not the only hefty bill that the Tories didn’t adequately budget for when they were in office. Another example is financial redress for the victims of the contaminated blood scandal. When, very near the end of its time, the Conservative government was impelled to announce a compensation scheme, ministers refused to put a number on the overall cost while knowing it would be huge. That bill is expected to come in at about £10 billion and the new government will have to stump up the cash. (https://www.theguardian.com/uk-news/article/2024/may/21/infected-blood-scandal-victims-to-get-compensation-payments-before-end-of-year) £10 billion here, £10 billion there, more billions elsewhere. We are talking about serious money.
A close associate of the chancellor tells me that she is “genuinely shocked and also very angry by what she has been presented with by Treasury officials.” She can’t be wholly surprised, though, having so often lambasted the Tories for their irresponsibility in the run-up to the election. During the campaign, Ms Reeves was asked what she would do if she discovered there was a fiscal black hole. She batted that away: “I’m not going to write a budget here.” (https://news.sky.com/story/im-not-going-to-write-a-budget-here-rachel-reeves-refuses-to-rule-out-further-tax-rises-if-labour-finds-black-hole-in-public-finances-post-election-13144558) She will have to write one quite soon. Cabinet colleagues think Ms Reeves, who plays a sharp game of chess, is organising the board so she can justify tax rises when she presents her first budget, expected in October. The chancellor’s signature pledge was not to touch the tax rates that effect most people, namely income tax, national insurance and VAT. (https://labour.org.uk/updates/stories/labour-party-tax-policy-how-we-will-make-the-tax-system-fairer/#:~:text=Labour%20will%20not%20increase%20income%20tax%2C%20national%20insurance%20or%20VAT.) So the expectation is that she will focus on taxes, such as those on capital gains, where the Labour line during the election was to say it had “no plans” to make changes. Finding that things are even worse than you thought supplies the alibi for tax increases which weren’t in the Labour manifesto.
The case for levying more on wealth is popular among Labour MPs. Those who want to see that happen are handed additional ammunition by a report published today (Sunday) from the Resolution Foundation. It paints a picture of rising levels of wealth inequality in the UK while arguing that wealth-related taxes are poorly designed, often easily swerved and produce revenues which are too low relative to other forms of taxation. The report reckons that immediate reforms to inheritance and capital gains taxes could raise approaching £10 billion a year. That wouldn’t dissolve all of the dilemmas facing Ms Reeves, but it would ease some of them. Putting up wealth-related taxes would be a lot more appetising to her party than the chancellor trying to meet her fiscal rules by taking lumps out of public services.
The think tank’s work on wealth taxes was commissioned when Torsten Bell was Chief Executive of the Resolution Foundation. (https://www.resolutionfoundation.org/about-us/team/torsten-bell/) This is relevant because he became a Labour MP at the election and already has a government role as PPS to Pat McFadden, one of the four-person “Quad” of senior cabinet ministers whose other members are Sir Keir Starmer, Angela Rayner and, yes, Rachel Reeves.
What a coincidence that an extremely well-connected think tank is mounting the case for higher taxes from wealth in the same week that the chancellor will set out how badly the government needs to find some additional revenue.
If tax rises are required, better to do them early in her chancellorship, when the responsibility can be assigned to the legacy from the Tories, than wait until later when the blame is more likely to be attached to Labour. So it is not unreasonable to think that her statement is designed to roll the pitch for tax rises in the budget.
This is not all. She is also hoping to impress upon her cabinet colleagues who run spending departments, as well as the Labour party more widely, just how grim things look. “It is going to take a long time to pick up the pieces,” says one confidant of the chancellor. “We are going to have to make some really, really difficult decisions.”
One of the big themes of this government is going to be the tension between the desire of Labour MPs to do Labour things and the lack of resources to do as many of them and as quickly as they would like. That triggered the trouble over the two-child cap on benefits. No-one in the cabinet likes the cap and few expect it to exist by the time of the next election. So the argument between the government and dissenting backbenchers boiled down to timing. Now, demanded the rebels. Wait, insisted the prime minister and chancellor.
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Just 7 Labour MPs, all of them from the marginalised Socialist Campaign Group, voted against the government in the end. Some argue that a prime minister with a landslide majority should have swatted them aside as inconsequential, not thwacked them with a sledgehammer sanction by booting them out of the parliamentary Labour party for six months. (https://www.theguardian.com/politics/article/2024/jul/23/labour-mps-vote-to-scrap-two-child-benefit-cap-in-first-rebellion-for-starmer) Sir Keir has been called an “authoritarian control-freak”. I am not persuaded he will regard that as an insult.
Defenders of the punishment meted out to the rebels say it was “a matter of principle” to sanction Labour MPs who voted with the opposition against a Labour King’s Speech which was based on a Labour manifesto put to the electorate less than a month ago. There’s also a nip—in-the-bud argument. This goes: if you let seven rebels go unpunished this time, you’ll have 30 Labour MPs voting with the opposition when the next difficult issue comes up, 60 the time after that and your majority will have unravelled before you know it. So while this can be interpreted as an example of Sir Keir’s ruthlessness, it is as much a demonstration of the leadership’s fearfulness that there are going to be many more occasions in the future when this kind of tension manifests.
All the more reason for Ms Reeves to pump up the volume about what a rotten mess the Tories have left her to clear up. It may well be preparing the ground for some tax rises, but it is not just about that. It is also a warning to Labour people, and to the electorate, that the road ahead is strewn with some extremely tough decisions on spending.