There may be trouble ahead, but Reeves plan might work

Rachel Reeves began that task today, in an important Commons statement in which she said the Treasury had found a £22bn black hole in this year’s Budget left by the outgoing Conservative government. The chancellor announced £5.5bn of cuts in the current financial year, and £8.1bn in the next. Her headline-grabber was to end winter fuel payments for all but the poorest pensioners (those on pension credit or other means-tested benefits). She scrapped Tory plans to bring in a £86,000 cap for an individual’s lifetime social care costs, and a series of road and rail projects, while unfunded proposals for 40 “new hospitals”, originally promised by Boris Johnson, will be reviewed.

Reeves signalled there would be “difficult decisions” to make on spending and tax before her first Budget on 30 October, and signalled a squeeze on welfare payments. With a nod to the financial markets, she said repeatedly: “If we cannot afford it, we cannot do it.” Her “cuts first, tax rises later” strategy is good politics. Reaching for the tax lever immediately would have underlined Tory claims she planned a tax hike all along. She will not break Labour’s manifesto pledge not to raise income tax, national insurance or VAT; she believes doing so would further erode voters’ trust in politics. But it’s clear that other tax rises are coming. Her options include aligning capital gains tax with income tax, raising inheritance tax, and restricting tax relief on pension contributions for high earners. Labour insiders insist tax rises were not a “done deal” before the election. “It was still an open question until we looked at the books,” one said. But the alternative of hoping that higher economic growth would allow Labour to raise spending on public services in a few years was never likely to work politically. The only way to blame tax rises on the Tories is to make them this year rather than closer to the next election.

However, Reeves is open to the charge of jeopardising the very economic growth which is the Starmer government’s most important mission, by cutting building projects to save money. Have the self-styled “builders” already become the “blockers”? Labour has long criticised the Tories for raiding capital spending budgets to preserve day-to-day spending and might now be making the same mistake. Reeves is choosing her battles carefully. She has approved pay review body recommendations for above-inflation 5.5 per cent pay awards for NHS staff, teachers and other public sector workers at a cost of £9bn — and the government is offering junior doctors a 22 per cent rise over two years. Why? More strikes would have scuppered Labour’s pledge to get public services “back to normal” and reinforced the impression of a country where nothing works — hardly the “change” Labour promised.

Reeves made a convincing case about the “black hole”. Inevitably, the Tories claim it is “fictitious”, but are doomed to swallow a dose of their own medicine. Reeves has removed the picture of Nigel Lawson from the wall of her Treasury office, but is using the playbook of another Tory chancellor, George Osborne, who ruthlessly blamed his painful austerity measures on Labour for leaving “no money” when it lost power in 2010. Although the real cause was a global financial crisis, voters bought the Osborne spin. Today, the Tories can argue their legacy for Labour was due to the pandemic and an energy price shock caused by the war in Ukraine. But, again, voters will probably accept the new government’s version of events while it has the benefit of the doubt (and the party just booted out has lost it).

The Tories’ spending plans did not add up. In fact, they barely existed. Their double cut in national insurance was a desperate ploy to save their own skin when public services needed more money, not less. The Tories went to the country this month on a false prospectus of further tax cuts that Jeremy Hunt now admits he could not have afforded. Like Labour, the Tories were complicit in the “conspiracy of silence” on tax and spending during the election. Labour eyes are already on the next election, and Reeves made a good fist of writing the opening chapter in her party’s narrative. Yet there is no guarantee the plan will succeed. “It’s not enough to say everything is broken – we have got to fix it,” one Labour MP admitted to me. The diagnosis is the easy bit. The cure will be much harder.

Is Labour making a rod for its own back? Yes, but there was no hiding the state of public services. The Tories tried it, and were rumbled: people can see the evidence with their own eyes. Labour knows it won’t fix every problem by the next election, but will have a good chance of winning a second term if it can show tangible progress and if the economy has improved. Then it would have a credible message: let us finish the job, don’t risk going back to the party which broke Britain. It might just work.