When Labor took office, the Treasury was ready. A week after the landslide election victory, ministers and senior advisors appointed to 1 Horse Guards Road were assembled by civil servants and shown a 25-minute PowerPoint presentation highlighting the financial mess.
The participants had no doubt that this was a training exercise designed to intimidate new employees. A shock session to force Labor to quickly deliver on its mandate and ensure Rachel Reeves prioritizes fiscal health in her first Budget.
It was not difficult for the prime minister to retreat into doom and gloom. Painting the Conservatives as a party of fiscal irresponsibility was exactly the message Ms Reeves wanted to send after coming to power, with Treasury analysis she commissioned showing a £22bn “black hole” in the public finances. That also helped.
It is clear that the Treasury was in a precarious situation. The deep tax cuts, delivered in a last-ditch attempt to save Rishi Sunak, were consistent with the Tories’ “fictional” spending plans and laid the ground for increased borrowing and new austerity. Debt as a percentage of the economy was on track to reach 100%, the highest level since the early 1960s.
But that wasn’t entirely true. House of Commons leader Lucy Powell has been accused of exaggerating the risks to financial markets after warning there was a risk of “pound hoarding” if the government did not make immediate spending cuts as it revealed fiscal pressures. Ta. But after gold yields stabilized, we emerged from recession, inflation subsided and the Bank of England cut interest rates, this was hardly felt in the City.
But over the past week, Labor has begun to pivot away from its darker message. In a conference speech in Liverpool last week, Mr Reeves signaled that the government would ease self-imposed fiscal rules to create more room for investment.
He said: “The time has come for the Treasury not only to calculate the costs of investments, but also to recognize their benefits.”
Some who had said there was nothing wrong with Labor warned there was a serious risk of market turmoil after all if the Prime Minister moved the goalposts too far. So which one is it?
The truth is that the balance lies somewhere between the two extremes. Somewhere between a George Osborne-style handbrake on the economy and a Liz Truss-style approach that puts the foot on the gas.
Jagjit Chadha, director of the National Institute of Economic and Social Research, says most investors know that fiscal rules extend far beyond the sell-by date. “If there is a financial institution that is clear about what the funds raised will be used for and can provide an appropriate return, the market will not be scared.
The gold market is not a monster that will bite your hand off.
“We need to come of age about our current debt levels and say that the status quo is what will rebuild our country after a period of decline.”
One minister said that in recent weeks they and their colleagues had become convinced of the need for action. “If we want voters to see progress, we have to act quickly.”
Mr. Reeves believes fiscal health is important, but he also knows that refusing to invest more would be irresponsible. By cutting back on things that could help promote future growth and finances. This is a Catch-22 that the UK has faced for 15 years, and we are stuck in a destructive loop that needs to be broken.
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Next month, Reeves is preparing to focus on three main goals for the budget. Solving health service problems. and rebuilding Britain’s economic foundations.
The first task will be to increase the resilience of households, given that at the end of the five-year term, living standards are lower than they were at the beginning.
That will include sticking to the message of stability. The Chancellor believes “tough” decisions will be needed to balance day-to-day spending with tax revenue. He would say stable inflation, which helps lower mortgage rates, is one of the benefits of addressing economic and fiscal health.
Mr. Reeves plans reforms that pay decent wages and prioritize good jobs, especially in the parts of the country that need them most. This includes increasing investment and strengthening workers’ rights. But the Chancellor will face continued criticism for scrapping winter fuel payments for all but the poorest pensioners.
The second is to solve health service problems. Here, the prime minister needs to increase spending and implement reforms. This priority is not only about improving health services for the benefit of the population, but also an economic necessity. To address record levels of long-term illness that are keeping working-age adults out of the job market.
Third is to unlock investments. This is central to Mr. Reeves’ plan as the key to strong economic growth in the future. Here the Prime Minister will prioritize Labour’s new investment arm, GB Energy and the National Wealth Fund.
But she will also push for a change in the Treasury’s notorious position and change its culture from a doom-ridden fiscal department to one focused on economic growth.
If the Prime Minister’s plan works, the prize on offer will be improved living standards, decent wages and increased income for the Chancellor of the Exchequer, without ever increasing tax rates.
