Rachel Reeves: Starts As She Means To Go On

Not quite a month into the new job and Rachel Reeves couldn’t help but issue a statement that lays bare the budgetary battle to come. More than just a statement in fact – there is also a letter to the Chair of the OBR and a policy paper from the Treasury entitled “Fixing the Foundations: public spending audit 2024-25”. Her press release states that this exercise found “£22 billion of unfunded pressures inherited from the previous Government“. She has had to cancel some things to pay for it. She wants to show she understands that to govern is to choose and that it really does mean tough choices: on restricting the winter fuel payment only to those on pension credit she stated “this is not a decision I wanted to make“.

She has started as she means to go on. She would like you to take away the ongoing theme: “The incompetent Conservatives left a mess and I will not sacrifice my fiscal credibility by failing to make unpopular decisions to clear it up”. 

An understandable political argument and one likely to fall happily on the ears of the “vote out the Tories” coalition that propelled Labour to a landslide victory even on only one-third of the popular vote. Who cares about pensioners anyway? Age is one of the most correlated demographic factors to voting Conservative. And even if anyone did care, Labour have a huge haul of seats so it doesn’t matter if they were to slip in the polls. Rachel can kitchen sink the tough decisions now in the honeymoon period, throw in some infrastructure spending later and in four years time use growth and better debt/deficit figures to dole out the vote-winning rabbits in the hat ahead of an election. Markets can rest easy, Rachel will not shy away from making the sums add up. Fiscal credibility will do its work. 

Except this pre-summer recess spasm contains a few red warning flags. 

1. The audit that isn’t an audit
Here is the table presented in the Treasury’s “public spending audit” exercise of where there is spending pressure:

The £9.4bn upward spending pressure on pay awards came from Reeves’ decision to accept the suggested increase from the independent pay review bodies. She might say she had to do this but it was still her choice, not that of the prior government. She still blamed them of course: “Because the previous government failed to prepare for these recommendations in departmental budgets, they come at an additional cost”.

There is also spending pressure of £2.6bn from “new policy commitments” – this is things like Rishi Sunak’s new qualification, the “Advanced British Standard”. The footnote says these are ‘assumed to be funded from the Reserve‘ which means that it can go in this table. 

If this sounds like nit-picking, that’s because it is. This is an audit that has ‘identified a problem’ of £21.9bn without it being a full scale budget. Or indeed much of an audit. If you were to subtract out the £9.4bn and £2.6bn then the ‘problem’ is more like £10bn. The UK is issuing £277bn of Gilts this year – this is a mere drop in the ocean. 

2. Cut 
But Reeves didn’t want you to think she would cover anything with extra debt. She wants to demonstrate her ability to get the spreadsheet to add up. Here is the table for how the ‘hole’ will be filled: 

Reducing how many pensioners will receive the winter fuel payment saves 1.4bn this year, then there’s 3.2bn that comes from savings in each department through reducing waste and spending on communications and consultants. Cutting Rishi’s new A Levels saves a grand total of 185million next year. She has also thrown in an end to Jeremy Hunt’s plan to offer the remaining government holding in NatWest to retail punters. (Don’t Tell Sid). The footnote at the end assumes that there would have been a “package of incentives for retail investors that equates to a discount to market price of between 10-15%” which would have cost 100-450million. (Not entirely clear why that’s the assumption but let’s give them the benefit of the doubt).

All in all this gets the £21.9bn down by 5.5bn this year and 8.1bn next year.

The thrust is: She’s prepared to cut things if the sums don’t add up.

3. The Sums Don’t Add Up
The eagle-calculatored amongst you will have spotted that this still leaves a shortfall. The document reveals “The immediate savings identified reduce the pressure from £21.9 billion to £16.4 billion in 2024-25. This is just the first step. As is usual, the government will continue to manage down the pressure and will take further decisions across tax and spending at the Budget”.

So now we are in the slightly bizarre situation where the Chancellor has jettisoned some winter fuel payments, the cap on social care and a number of (not yet started) infrastructure projects to show willing. She starts as she means to go on. 

4. Unpopular
Even with the post election honeymoon period and the hot summertime lull, some people aren’t very happy at these decisions.

• Consumer Champion Martin Lewis immediately issued a formal statement that ‘The Chancellor’s just announced Winter Fuel Payments will no longer be universal to all pensioners, now only pensioners on benefits will get it – in my view that’s too narrow a group… there’s a usable precedent from the emergency energy crisis measures announced in April 2022, which I’d urge the Government to look at. Then, a payment was made to homes in council tax bands A to D – as an imperfect but workable proxy for lower household incomes“.
• A disabled pensioner rang LBC to say they would never vote Labour again as “I couldn’t have believed Labour would do something so iniquitous“.
  
• Sir Andrew Dilnot, the architect of the social care plan of 2011 said that dropping the cap on spending was a “tragedy“.
• The Director of Age UK said it was “really bad news for all those older people who were hoping against hope for some relief from their sky high care bills”.

Still, with a 167 seat majority and a massive debt problem, why should the government care? This is the time to take the unpopular decisions.

5. Why now?
This all feels as though it could have waited until the Budget on 30th October. A full Budget with full independent OBR costings can be crafted to hide a multitude of sins and to shout about a plethora of initiatives. 

Two reasons: public sector pay and public debt.

• On pay, the government couldn’t wait three more months. They have to reduce the risk of strikes and get people working productively. Not just in the NHS, where they also need waiting lists to come down, but also for teachers and so on.
  • There is a whole annex at the end of the Treasury’s ‘Audit’ entitled “Responding to the 2024-25 Pay Review Bodies’ Recommendations” (another example of how it’s not really an audit).
  • This nit-picking section picks up the factoid that ‘In July 2023, one of the main contributors to the fall in monthly output was the human, health and social work activities sub-sector, which fell by 1.2%. This was attributed to a 2% fall in the human health activities industry amidst strike action from healthcare workers‘.
  • One month from last year but enough to warrant mention in the audit – meaning it warranted attention from the Chancellor. 
• On debt, the government cannot afford to break its fiscal rules before it begins. Particularly as the forecasts that will determine if those rules are broken will now sit even more firmly with the OBR.
  • Reeves was panicked enough about the specific data point of the public sector net debt figures to refer to them explicitly in her statement: ‘We have already seen official ONS figures this month showing borrowing is higher this year than the OBR expected‘.
  • She also referred to her panic about having to issue any more debt, noting that the £21.9bn, ‘If left unaddressed it would have meant a 25% increase in the government’s financing needs this year, pushing gilt issuance further into record highs outside of the pandemic‘.

This is the real heart of the issue. Utter paranoia about failing to meet fiscal rules as determined by the OBR and having to issue any extra debt. The shadow of Liz Truss looms as large over the Labour Party as the Conservatives. And no wonder, when convexity in LDI pension funds ultimately led to the removal of a prime minister. 

6. The Budget
This means we shall be greeted by Sunak Spreadsheetism on speed. But this time, the Chancellor will not also have to optimise the numbers against what is politically possible when constrained by a faction of their own party. Reeves can do what she likes. And her ideology, as revealed in her Mais Lecture, is classic socialism. The focus will be on tax rises. Get ready for it all: capital gains tax equalised with income tax, inheritance tax hikes, pensions reform etc etc. A source told the Guardian in June that ‘Rachel has between 10 and 12 measures she is looking at which she hasn’t yet announced, all of which will raise small pots of money, with the ambition they should add up to something all together‘.

Except we now know that the “something” to which they must all add up is larger than she apparently first thought. So, more measures will come. 

7. Transparency and Accountability
The other reason for getting out of the traps early is so that her own party gets the message: Find savings. Don’t ask for the world. If you do, I have to sacrifice something. The key refrain of her statement was ‘if we cannot afford it, we cannot do it’.

Hence she also announced the creation of the Office for Value for Money.

Ministers, you will be watched. 

And not just by her. The Office of Budget Responsibility is going to be even more important, with a new Charter:
“We will require the Treasury to share with the Office for Budget Responsibility its assessment of immediate public spending pressures, and enshrine that rule in the Charter for Budget Responsibility… so no government can ever again cover up the true state of the public finances”.

This prompted the chief of the OBR, whose term ends in October next year, to issue his own letter to the Treasury Select Committee where ‘Given the seriousness of this issue [of overspend], I have initiated a review into the preparation of the DEL forecast in the March 2024 EFO‘. In other words, he’s going to look into how Rachel Reeves was so shocked and appalled by the overspend pressures she found. As he puts it ‘We were made aware of the extent of these pressures at a meeting with the Treasury last week’.

The OBR is watching too.

8. Scufflers
This then prompted Jeremy Hunt to write a letter to the Cabinet Secretary over concerns that “either the spending plans in Estimates signed off by Senior Civil Servants and presented to Parliament are incorrect, or the document the Chancellor has produced to the House today is wrong“. 

This might sound like a pointless scuffle but it gets to the heart of the argument Reeves is making. It’s not just that the prior administration got their numbers wrong. She told Sky News ‘Jeremy Hunt covered up from the House of Commons and from the country the true state of the public finances. He did that knowingly and deliberately. He lied. And they lied during the election campaign about the state of the public finances’.

It’s usually dangerous for any politician to claim another lied. Mostly because they might also have to indulge in creativity in the future. Emergencies happen. Numbers change. The OBR won’t always be right and when it’s wrong the government will have to take political decisions that might not be the first best option.

It also sets up the mother of all replies on 30th October in Parliament. The new Conservative Party leader isn’t announced until 2nd November so one of the two former Chancellors, Hunt or Sunak, will be ready to respond. For Sunak it will be his last moment to define a legacy and he won’t want it to be one where his integrity is impugned. Reeves had better be ready for his spreadsheet, honed after years at the Excel coalface. 

9. Opposition
Not that it matters. With the Conservatives having so few MPs, the real opposition is the Labour Party itself. Reeves is in pole position now but any false moves and her iron rod will turn to ash. There will be those within the party who will chafe against the restrictions of the inflexible Chancellor and the unelected OBR. Particularly those who wanted, say, £28bn for green spending?

Rachel Reeves has started as she means to go on. Perhaps now that she’s started, she shouldn’t wait three months to finish. As she probably won’t.