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The King’s Speech on Wednesday laid out Labour’s initial legislative agenda. But its importance in setting the new administration’s priorities is likely to be surpassed by Rachel Reeves’s statement to parliament towards the end of July. In what will certainly not be dubbed a “mini” Budget, the chancellor’s words will underpin this government’s economic policy in office.
Reeves’s motivation is clear. The Treasury analysis she will present provides a baseline against which the government can be judged. Last week, she promised to include an assessment of the “spending inheritance” from the last government and an update on the state of the public finances. But there will be no surprises — she has already said the Treasury confirmed her prior view that Labour faces “the worst set of circumstances since the second world war”.
There are two intended audiences. First and foremost is her own colleagues. The weak public finances will be used, as ever, by Treasury officials and ministers as a disciplining device for other spending departments. They provide orthodox chancellors with an ability to say “no” to requests for money. And Reeves is perhaps the most orthodox chancellor we have had since Alistair Darling.
The second audience is the public. Although the statement will not be a traditional “opening the books” moment, the terrible inheritance Reeves will describe is designed to soften us up for difficult decisions in a Budget, probably in mid October. That will include some more tax, higher public borrowing and a period of substandard public services.
No decisions have been taken yet on Budget measures but a likely programme will entail all three options — with blame heaped on the Conservative governments of the past 14 years.
In terms of taxation, do not doubt Reeves’s determination to keep the core election promises: no rises in income tax, national insurance and value added tax. We can expect to see income tax allowances frozen for longer than 2028-29, plus other relatively modest tax increases. A volte-face would be difficult to justify politically — and suggest that Conservative election claims about Labour’s tax plans were true.
An easier route will be to increase public borrowing while sticking to the announced fiscal rules. The most likely mechanism here stems from a Bank of England statement, due in September, that is likely to curtail active sales of assets at least for 2024-25 in order to limit the speed at which it shrinks its balance sheet. Due to absurdities in the design of the UK’s fiscal rules, this small monetary loosening would generate more scope under the rules for a fiscal loosening and the sums are far from trivial. About 0.5 per cent of GDP is probably available.
It would make much more sense to use a definition of public debt, in which interactions with BoE programmes did not affect the level of borrowing consistent with the fiscal rules. This would also allow more borrowing but would look like shifting the goalposts, whereas a BoE change in policy, endorsed by the Office for Budget Responsibility, would appear to be the effect of good management of the economy by the new government.
The third consequence of this month’s fiscal statement will be to warn the public of the need for more time — and more patience — before the UK sees big improvements in public services. With little time to plan, the autumn’s spending review is likely to cover just the 2025-26 financial year and will almost certainly remain tight.
Labour’s ambition will be to make a start in turning around public services while reminding people constantly of a tarnished legacy. It is much the same tactic that David Cameron and George Osborne employed in the years after the 2010 election. We should all get used to it: history tells us it works.
chris.giles@ft.com
