What Reeves is Doing Right
This coming week will see the Public Spending Review: probably the most difficult test of this Labour government since it was elected a year ago.
The Chancellor, Rachel Reeves, will be attacked from all sides. Friday’s newspapers write themselves: hostility from the ‘over-taxed’ tribunes of the Right, much of it wrapped in misogynist language about bird-brain ‘Rachel from Accounts’; frustration from the Left that the Magic Money Tree is not producing the expected crop of seasonal fruit; and disappointment from everyone else that she isn’t, after all, the Growth Fairy promised in the Labour manifesto.
In fact, the Chancellor is a competent and decent, economically literate individual, tied hand and foot by political and economic bondage. She inherited an almost stagnant economy burdened by barely sustainable public debt, the legacy of a series of damaging economic shocks: the financial crisis; Brexit; the Covid lockdown; the Ukraine War and ‘cost of living crisis’. She also inherits a nonsensical set of commitments on tax from the Labour Manifesto. And to add to all that, the madness and badness of Trump are creating chronic uncertainty in global markets.
Nevertheless, and acknowledging some silly mistakes, she has done three good big things. The first is to promote public investment. Gordon Brown, for all his formidable qualities and that he operated in easier economic conditions, was never able to persuade the Treasury to borrow to invest. Public investment took place through the expensive and over-complicated PFI scheme. Infrastructure was starved of investment capital.
Then, in the Coalition years, those of us who wanted more public investment faced implacable opposition from the Treasury. It was terrified of alarming the bond markets, even if that meant cutting productive projects. Yet Rachel from Accounts has managed to master public debt accounting, allowing an extra $113 billion in capital spend. The markets bought it.
Her second big achievement has been to stick to unpopular disciplines on current - day to day – government spending. There is virtually unlimited political demand for spending on the NHS, benefits, industrial subsidies, and higher pay for everyone in the public sector. And there are compelling arguments to spend lots more on defence, policing, science, early years education and to rebuild the broken aid programme. But these must all be paid for to satisfy the basic fiscal rule: to balance current spending with tax.
The Labour Party was so insecure about the outcome of the last election that it was unwilling to commit itself to a higher tax/higher spend, socially democratic, future: Copenhagen-on-Thames.
So, Rachel Reeves has been left to perform the role of Scrooge.
In defending this uncomfortable position, she owes a big debt to the ludicrous Liz Truss. Ms Truss single-handedly destroyed the Conservatives’ claim to economic competence and, more importantly, provided a demonstration of what happens when governments try to teach the bond markets that 2+2=5. But, still, it requires competence and courage to be a Labour Chancellor faced with brutally hard choices, in the mould of Cripps, Jenkins and Healey.
The third positive is directionally right, even if badly executed: recognising that one of the biggest and most damaging inequalities in Britain is between, on the one hand, young working families in precarious, badly paid jobs and rental accommodation, and better-off retired people with appreciating property assets, generous pensions and heavily defended state entitlements. Some redistribution from the asset-rich to those at the bottom of the pile will be a measure of this government’s claims to social justice. Rachel Reeves understands this.
The end of Winter Fuel Payments was meant to signal intent. After all it makes no sense for a fiscally constrained government to pay well off pensioners, like me, a tax-free bung. Had the WFP been taxed there would have been few complaints; but outright abolition affected even the poorest pensioners. That said, thanks to the Coalition’s ‘triple lock’, pensioners have been largely shielded from the worst of post-financial crisis austerity and pensioner poverty is- thankfully – much reduced since the turn of the century.
From the standpoint of inter-generational fairness, it was also right for the Chancellor to attack the loopholes around Inheritance Tax though, surely, someone in the Treasury should have spotted that family farms present special problems. The next big step will be making council tax more progressive to reflect the value of property. Taxing high-value property will also go a long way to meet Angela Rayner’s demands for a ‘wealth tax’ since half of household wealth is unproductive, in the form of property. But property millionaires will howl with rage.
Unless her boss panics in the face of Reform’s shameless populism and sacks her, Rachel Reeves faces even sterner tests ahead. Most of these centres on taxation, since more will be very likely be required in the autumn budget. She will need to confront the popular myth that Britain is a relatively highly taxed country. Tax as a share of GDP is in fact close to the OECD average.
It is surely time to slaughter the sacred cow of manifesto commitments which were made in wholly different geopolitical and economic circumstances. But fear of deepening public cynicism and inflaming populist politics of left and right probably makes that impossible. Absent a rethink about tax, the Chancellor will be forced into measures like a continued freeze on tax thresholds which is a more regressive way to raise income tax than the manifesto pledge not to raise rates. Or raiding business in ways that hit productive investment.
The pain would be eased if Rachel Reeves does turn out to be the Growth Fairy after all. She could be excused if she isn’t. Beyond short-term bursts, no post-war Chancellor -from George Brown to Thatcher’s Chancellors to Gordon Brown - has been able to do much to shift the long-term trend growth in productivity upwards. But some hope lies in her creative ideas for steering British savings into British investment and in the welcome return of industrial strategy.
Sir Vince Cable is a former Secretary of State for Business, and led the Liberal Democrats from 2017-19.
