Seeing red: Rachel Reeves claims she has inherited the worst economy since the Second World War
Former Labour Chief Secretary to the Treasury Liam Byrne deeply regrets the note he left for his Tory successors in 2010 when he declared: ‘I’m afraid there is no money left.’
His letter, a tradition among departing Ministers, left the impression that Labour had squandered its stewardship of the economy rather than saved the world following the Great Financial Crisis.
The current Chancellor Rachel Reeves and her boss Keir Starmer appear to have learned nothing from this episode.
This week, following the publication of figures showing the national debt at its highest level as a proportion of GDP since the early 1960s, a Treasury Minister said that the new Government had ‘inherited the worst economic circumstances since the Second World War’.
However, although national debt is higher than it was when the Conservatives came to power in 2010, the deficit is lower, as is unemployment and inflation.
At her debut in the grand Churchill Room in the Revenue & Customs building Reeves also declared her Government had inherited ‘the worst set of circumstances since the Second World War’.
For good measure she added: ‘We face a legacy of 14-years of chaos and economic irresponsibility.’
The negativism, laid on with a trowel, was part of a choreographed Labour strategy to portray the Tories as having left a dire legacy that will take years to erase.
Instead of offering a message of a brighter future under Labour, the Starmer team has opted for the David Cameron and George Osborne approach of blaming everything on your predecessors.
At the core of Reeves’ address, in which she unveiled plans to drive a coach and horses through planning laws to build 1.5 million homes, was a promise to provide a full Treasury audit of the public finances. There was, of course, a paradox at the heart of this.
Here she was promising to strengthen the role of the Office for Budget Responsibility, so that every fiscal event is legally required to be scrutinised (legislation included in last week’s King’s Speech) while ordering her own freelance assessment.
There should be no mistaking what all this is about. Reeves is not going to find that Jeremy Hunt and his Tory predecessors were brilliant custodians of the public finances.
She aims to show that somewhere there is a big black hole and that this in the end can only be plugged by raising taxes.
This despite the fact that, at 38 per cent of national output, taxes are at the highest percentage since the Second World War.
The Labour manifesto ruled out raising VAT (beyond private schools), income tax or national insurance contributions so if there are to be new levies they may well focus on wealth.
What is not entirely clear is why the Reeves exercise is necessary. The OBR is already preparing a full assessment of the public finances for an early autumn Budget. So the assessment, which Reeves ordered before the summer recess, must be regarded as a softening up exercise for pain to come.
Moreover, the OBR provides regular updates each month with the public borrowing and debt figures, so there is no shortage of up-to-date data for the Chancellor.
The independent Institute for Fiscal Studies has already talked of a ‘conspiracy of silence’ around funding for public services in light of promises made.
In an assessment of the spending needs on health and social care in the main parties’ manifestos it found just £1 billion of funding. Yet if, for example, Labour’s NHS workforce plan were to be implemented the cost could be 20 times that.
Painting the gloomiest picture of an inheritance allows an incoming government wiggle room and time.
A confidant of the Prime Minister is quoted in last weekend’s Observer as saying: ‘It’s crucial to buy us time. If we don’t explain the scale of the problems people will get frustrated with us.’
There has already been a warning from big housebuilders that high mortgage rates mean completion targets have been lowered.
Barratt says it needs to play catch-up by buying more land and opening sites: none of which is fast. There is some flexibility in the way a Treasury audit will be conducted.
A gloomy output forecast, such as that of the Bank of England, will come up with a far bigger budget deficit than a more positive outlook.
The latest forecast from the International Monetary Fund, to be released on Wednesday, is expected to show growth rising by 0.7 per cent in the first three months of 2024, with a similar figure achievable in the second quarter. This has already moved the dial.
Higher output means more tax income from VAT as people spend. An analyst from the Office for National Statistics claimed the economy was going ‘gangbusters’ in the first quarter. That should mean more corporate and income tax revenues.
The danger is that Labour – by portraying the economy as a fiscal basket case – will create a self-fulfilling prophecy. For the moment markets are on side with the pound and stock markets bubbling away on the prospect for stability.
A dire assessment could hurt this rise in confidence. The Chancellor has to be careful what she wishes for.
August can be a tricky month on the markets. As the big beasts among the traders retreat to their yachts, the underlings have been known to seize the opportunity to boost their bonus pots. Feeding dealers ammunition to sell UK assets could be risky.
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