Rachel Reeves slams Tory ‘cover-up’ – but Labour could fall into the same mistakes

Good morning. Rachel Reeves’ statement yesterday that “there’s a hole in my budget” was the subject of much cynical commentary before the event, much of it from me.

We already knew, as I wrote often during the election campaign, that the Conservatives’ spending plans were essentially fictional. (Richard Hughes, the director of the Office for Budget Responsibility, went further, saying it was “probably generous” to describe the government’s departmental plans as a work of fiction.)

But what the new government’s audit seems to show in a comprehensive way is that it really… No It is not clear how far the outgoing Conservative government has ignored the pressures that have been building up over the year. In a coup for the chancellor, the UK’s two tax referees have confirmed her claims. Paul Johnson of the IFS has said that “Rachel Reeves is entitled to feel somewhat aggrieved”, while the OBR has launched a review into “the adequacy of the information and assurances provided to the OBR” by the previous government.

Politically, Reeves’ speech has already been a bit of a thorny issue for the Conservatives, who have found themselves torn between two bad arguments. First, arguing that the public finances deficit was already known runs up against the problem that the current level of public services in the UK is not visibly satisfying to most voters, and saying that the previous Conservative government knew about the overspending is simply rubbing salt in the wound. And arguing that the Conservatives left Labour a good economic legacy runs counter to the UK’s poor economic performance since the financial crisis.

Unless the OBR review concludes that Labour had adequate information – which this morning seems unlikely – that rebuke from the UK’s fiscal watchdog is going to be a political wound that the next Conservative leader will have to cauterise if he is to succeed.

But the good news for conservatives is that some of Reeves’ response to his legacy bears a striking resemblance to the mistakes conservatives made in office.

So it is possible that the decisions he took yesterday to cover the £22bn deficit and in his first budget on 30 October could speed up the Conservative Party’s return to power. Here are some initial thoughts on that, and more over the rest of the week, the summer and indeed I imagine over most of the days between now and the budget.

Heart in the hole

Rachel Reeves’ audit of the spending pressures facing the new government makes a fairly comprehensive case that the £20bn Jeremy Hunt spent cutting national insurance before the election was, to put it mildly, reckless, but she is going to stick with the cuts to national insurance.

In short, that’s the biggest political bet Reeves has made yet. He’s weighed the electoral cost of using these larger-than-expected spending pressures to abandon his promise of national insurance, and he’s betting that cost will be greater than the cost of means-testing winter fuel allowances for retirees, canceling a raft of infrastructure projects, finding more novel ways to raise revenue, and overseeing more restrictive rounds of spending for the foreseeable future.

Not all of these policies are created equal: the winter fuel allowance was created at a time when the state pension was significantly smaller than it is now. So it makes sense that, as the triple lock gradually increases the generosity of the state pension, measures designed to supplement it will be means-tested and, where appropriate, phased out altogether.

Reeves also became the latest Chancellor of the Exchequer to abandon plans to cap social care costs. The failure to tackle this problem and solve the country’s social problem has knock-on consequences for the NHS, and improving health service conditions is the most important thing people want from a Labour government. In both political and policy terms, this move is fraught with risk.

In recent decades, putting off tough decisions about welfare has become a new British political tradition. An older one is that when things get tough, the Chancellor of the Exchequer cuts infrastructure spending (indeed, we have also seen the Chancellor resort to this measure when things are going well). Doing so is bad for the UK’s growth prospects and also bad for Labour’s hopes of breaking out of the vicious cycle of slow growth and underfunding of struggling public services.

Ruling out increases in national insurance and income tax (as well as increases in value-added tax and corporation tax) does not just mean giving up the government’s biggest revenue-raising resources. It means relying on taxes that risk more damaging Labour’s plans to rebuild Britain, and which may be more unpopular and cause more controversy than reversing a tax cut that did nothing to improve the Tory’s fortunes. As the FT editorial board warns, Labour risks falling into the same trap as its Tory predecessors – which may mean that, even if the Tory party appears to have no real answer to Labour’s attacks, the winner of this summer’s Tory leadership election could end up in Downing Street.

Now try this

This week, I’ve been listening to mostly Dire Straits. Comrades in arms While writing my column, while the title track is deservedly beloved, I think “So Far Away” is my favorite.

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