Rachel Reeves has had a shaky start as Chancellor. The decision to scrap universal winter fuel payments has been condemned across the political spectrum. He has been attacked by everyone from union leaders to his predecessor, Chancellor Jeremy Hunt. Even senior Labor figures such as Ed Balls appear stunned by his approach. Canterbury MP Rosie Duffield cited the decision as one of the reasons she resigned from the Labor Party.
The chancellor likes to present himself as a careful strategist with the ability to think several steps ahead in his beloved chess matches. He also defends his time working at the Bank of England, claiming he gained experience studying the travails of the Japanese economy. But it’s hard to see a clear strategy in Reeves’ approach. What is his main economic argument? Reeves doesn’t seem to have learned much from the mistakes of Japan’s lost decade, either. Instead of promoting the growth he promised to champion when in opposition, his rhetoric in Government has led to a collapse of business and consumer confidence.
He will rise to deliver his first Budget in less than a month. It will also confirm the overall spending scope for the coming years; this is the total amount of money the Government has on hand. His hand can be strengthened by improving economic forecasts. But he will need to find billions of pounds to avoid making real-term cuts to departmental spending and meet his commitments. He can increase this either by taxing or by borrowing.
Before the election, Reeves had ruled out changes to so-called fiscal rules that limit how much the government can borrow. But will he break his promise? He appears inclined to take on more debt to finance spending, especially given that many of the tax changes he proposed before the election collapsed under scrutiny. However, more borrowing will risk higher interest rates and harm economic growth.
He has floated a number of revenue enhancers in opposition which he claims will provide extra revenue for pet projects. It is estimated that the changes he proposes in private equity funds will actually cost the Ministry of Finance. Their restrictions on non-Doms trigger the migration of wealthy foreigners. HM Treasury fears that it may reduce the amount collected from the tax. The Conservatives tried to draw attention to these dangers before the Election but were stymied by Reeves.
It appears that the Chancellor is currently considering increasing National Insurance contributions for employers. This would be a tax on businesses.
Reeves also made a number of strange decisions within his own department.
Reeves also discussed a push for private pension tax relief. But now he is reportedly backing out. What seems to have changed his mind is that the crackdown will primarily affect public sector workers. We know that harming pensioners is not a concern for the Chancellor. What he seems unwilling to do is risk incurring the wrath of public sector Union leaders.
He bowed to union leaders’ demands for public sector pay, agreeing to big increases for workers such as train drivers, while trying to claim he had inherited a “black hole” in public finances from the last Government. And he allowed other ministers to bow to Union demands in other areas, for example by watering down strict school inspections. These are important. School standards are key to our long-term economic growth.
The Chancellor’s proposed increases to Capital Gains tax will deter investment, hinder growth and – ironically – make it harder to achieve the green transition he is determined to champion.
After all, one area Reeves is willing to spend money on is Net Zero. Foreign aid and carbon capture and storage budgets for climate measures were approved. On the contrary, he appears keen to oversee the end of steelmaking in the UK, the collapse of the oil and gas industry in the North Sea, and the deindustrialization of Britain.
He also made a number of strange decisions within his own department. Why did he think it made sense to employ one of his personal donors as a Civil Servant without even reporting the donation to his Permanent Secretary? Why did he schedule a conference to attract overseas investment before this Parliament’s budget, which will set tax levels? And, as Alastair Campbell wondered aloud, why did he wait so long to deliver his first budget?
In opposition, Reeves devoted much attention to what he claimed was the corruption of the last government. But in less than 100 days he bent the rules by appointing an anti-fraud commissioner (as I discuss here ) and spectacularly allowed an employee of a lobbying firm to organize his meetings with businesses at the Labor Party Conference in Liverpool.
The Budget will be a pivotal moment for the new Labor Government, which has been rocked by tumultuous events in Downing Street and a growing nepotism scandal. In the past, Rachel Reeves has shown that she can be principled. Unlike Keir Starmer, he refused to serve under Jeremy Corbyn’s leadership. But he will need more than a new hairstyle to change public perception of his chaotic start as Chancellor.
Henry Newman is a former special adviser to Boris Johnson and Michael Gove.