Rachel Reeves has had a shaky start as Chancellor. Her decision to remove universal winter fuel payments has been condemned right across the political spectrum. It has been attacked by everyone from Trade Union leaders to her predecessor as Chancellor, Jeremy Hunt. Even top Labour figures such as Ed Balls seem baffled by her approach. The Canterbury MP, Rosie Duffield, cited the decision as one of the reasons she resigned the Labour whip.
The Chancellor likes to present herself as a careful strategist, skilled at thinking several steps ahead in her beloved chess matches. She also champions her time working at the Bank of England, claiming she gained experience studying the travails of the Japanese economy. Yet it’s hard to discern any clear strategy in Reeves’s approach. What is her central economic argument? Nor does Reeves seem to have learned much from what went wrong with Japan’s lost decade. Rather than promoting the growth which she promised to champion while in Opposition, her rhetoric in Government has led to a collapse in business and consumer confidence.
In less than a month she will stand up to deliver her first Budget. She will also confirm the overall spending envelope for the years ahead – that’s the total amount of money Government has at its disposal. Her hand may be strengthened by improving economic forecasts. But to avoid making real-terms cuts in departmental expenditure and to meet her commitments she will need to find billions of pounds. She can either raise that through taxation or borrowing.
Before the Election Reeves ruled out changes to the so-called fiscal rules, which limit the amount Government can borrow. But will she break that promise? It seems she is tempted to borrow more to fund spending, particularly as so many of the tax changes she proposed before the election have collapsed under scrutiny. But more borrowing will risk higher interest rates, damaging economic growth.
In Opposition she floated a series of revenue raisers which she claimed would provide extra income for pet projects. Her proposed changes to private equity funds are actually now projected to cost the Exchequer money. Her clamp down on non-doms is triggering an exodus of wealthy foreigners. HM Treasury fears it could reduce the amount taken in taxation. Conservatives tried to point out these dangers before the Election, but were poo-pooed by Reeves.
The Chancellor is apparently now considering increasing National Insurance contributions for Employers. That would be a tax on jobs.
Within her department Reeves has also made a series of bizarre decisions
Reeves also considered a raid on personal pension tax relief. But she is reportedly now backing away. What seems to be changing her mind is that the raid would primarily affect public sector workers. We know hurting pensioners does not worry the Chancellor. What she seems unwilling to do is risk the wrath of public sector Trade Union leaders.
She has bent to the wishes of Trade Union leaders on public sector pay – agreeing to large increases for workers such as train drivers, while simultaneously trying to claim that she inherited a “black hole” in the public finances from the last Government. And she has let fellow ministers capitulate to Trade Union demands in other areas, for example by watering down rigorous school inspections. These things matter. School standards are key to our long-term economic growth.
The Chancellor’s proposed increases to Capital Gains tax will deter investment, hamper growth and – ironically – make it harder to achieve the green transition which she is so determined to champion.
One area where Reeves is willing to spend money after all is on Net Zero. Budgets for foreign aid on climate measures, and for carbon capture and storage have been confirmed. In contrast she seems willing to oversee the end of steel making in the UK, the collapse of the oil and gas industry in the North Sea, and the deindustrialisation of Britain.
Within her department she has also made a series of bizarre decisions. Why on earth did she think it was sensible to employ one of her personal donors as a Civil Servant, without even declaring the donation to her Permanent Secretary? Why has she scheduled a conference to attract overseas investment for a date before her budget which will set the taxation levels for this Parliament? And why, as Alastair Campbell wondered aloud, did she wait so long before delivering her first Budget?
In Opposition Reeves made a big deal of addressing what she claimed was the corruption of the last Government. But in less than 100 days, she has bent the rules in appointing a counter-fraud commissioner (as I argued here), and extraordinarily allowed an employee of a lobbying firm to organise her meetings with businesses at Labour Party Conference in Liverpool.
The Budget will be a key moment for the new Labour Government which has been buffeted by tumultuous events in Downing Street and a growing cronyism scandal. In the past, Rachel Reeves has shown that she can be principled. Unlike Keir Starmer, she refused to serve under Jeremy Corbyn’s leadership. But she will need more than a new hairstyle to change public perceptions of her chaotic start as Chancellor.
