How much can Rachel Reeves be trusted? A chancellor’s credibility counts for a lot with the markets, which are asked to lend Her Majesty’s Government tens of billions a year. Reeves claims to be serious and sincere, something her Tory predecessors did not. But tomorrow she risks looking dangerously like Liz Truss and producing her own assessment of the public finances, while cutting out the Office for Budget Responsibility (OBR) service. She plans to declare a £20bn hole, we are told, and to say she is shocked – shocked! – at the mess the finances are in. An excuse to raise taxes, borrow more, or both.
Reeves claims to be serious and sincere, in a way her conservative predecessors were not.
This would mark a big change from what he said during the campaign. “We now have the OBR,” he told the Financial Times“We know the situation is pretty bad. You don’t have to win an election to know that.” How can she then go straight from that to saying that, having won an election, she is surprised to discover that the situation is pretty bad? And why leave the OBR out of the picture, as Truss did in her first weeks?
Politically, it is easy to see what Reeves is up to. He wants to create his own version of Liam Byrne’s now infamous “no money left” note and claim that he has found a terrible scandal – unexpected damage that he has to clean up. But the damage was not only expected, it was spelled out by everyone, and in particular by the OBR just a few months ago in its March statement.
We all know about the broken promises for the blood transfusion scandal (some £10bn) and the refusal to find funds for wartime defence spending in Europe. It is appalling, and the Tories have rightly paid a high price for their fiscal incontinence. But what it is not is a major discovery. Even Paul Johnson of the Institute for Fiscal Studies points out that “there really should be no sense of surprise that there is such a serious problem here.”
Reeves will also have guessed that independent pay review bodies would propose something like a 5.5 per cent rise for workers, and it is his choice to accept this rather than (as the Conservatives did) bring it closer to inflation of 2.2 per cent.
With the Tories pitted against each other and an overwhelming Labour majority, Reeves can get away with whatever she wants, at least politically. But she should have produced a proper post-election budget, with the OBR present to audit the assumptions. If she turns out to be a chancellor who makes promises to get out of a tight spot and then breaks her word, all her future promises and assurances will be analysed through this lens. And if she ends up borrowing more, turning to the markets as Liz Truss did, then her credibility with those markets will be paramount.
For this reason, I would be surprised if she broke any of her election promises or suddenly announced a wealth tax (as advocated by the Resolution Foundation, the left’s most influential think tank). It would amount to a huge devaluation of herself and leave her open to accusations that she is more of an epigone of Liz Truss than her nemesis. So she could simply suspend or cancel unfunded capital spending that the Tories have promised (such as the £1.7bn Stonehenge underpass or the £9bn Lower Thames Crossing. Or that ridiculous Tory plan to pay for childcare for babies over nine months old no matter how rich their parents are).
He may decide not to pay for the care homes of rich families who can easily afford their own care – one of many voter bribes that Boris Johnson has failed to pull off. The Tories ended up spending like drunken Keynesians and there is too much spending to cut. So perhaps that is what he will end up doing. If so, he would have my full support.
The OBR was set up because the last Labour government stretched the truth too much with its forecasts, leading to market jitters and calls for politicians to be banned from making them. Reeves has called for him to be taken seriously and so far the markets are inclined to agree. That trust is precious and he would be ill advised to squander it tomorrow.
