FILE PHOTO: Britain's Chancellor of the Exchequer Rachel Reeves chairs a meeting of the National Wealth Fund Taskforce at 11 Downing Street in London, Britain, July 9, 2024. JUSTIN TALLIS/Pool via REUTERS/File Photo
WASHINGTON: Rachel Reeves drew cheers from investors at a British Embassy reception in Washington this week as she notes that the budget she’ll deliver on Oct 30 will mark the first by a female Chancellor of the Exchequer in the 800-year history of the role.
It will also be a legacy-making moment that shapes British politics for the rest of the decade.
With Reeves due to announce as much as £40bil in tax hikes and spending savings, plus a revamp of Britain’s fiscal rules to allow for an extra £70bil of government borrowing for investment, it will mark Labour’s bid to boldly reset the nation’s public finances and lay the foundations for an election win in five years’ time.
“I cannot think of a budget where the stakes have been so significant,” said Steven Fielding, emeritus professor of politics at Nottingham University and author of several books on the Labour Party.
“The budget is going to define this Labour government.”
Gloomy assessments by Reeves and Prime Minister Keir Starmer in the run-up to the budget about the state of the public finances have dragged down business and consumer sentiment, while expectations that their plans will entail a significant up-tick in borrowing have weighed on gilts.
But Reeves’ bet is that in time, voters and business will see the value of a budget containing upfront pain in the form of tax hikes and tight spending plans, with the promise of long term gains in investment and growth.
It’s a high-wire moment for Reeves, a former Bank of England economist who has become the most powerful figure in Starmer’s new Labour administration, because of how much she’s trying to achieve.
The chancellor wants to simultaneously fix the nation’s straitened public finances through tax hikes and spending cuts, while delivering on Labour’s election promise to deliver “change” – requiring extra borrowing and investment.
Meanwhile, she’s also striving to keep watchful financial markets on side.
The package she’s homing in on looks set to raise the tax burden to its greatest since World War II and lift debt even further from a 60-year high, while aiming for the greatest persistent investment commitment Britain has seen for decades and also ending austerity for public services.
Reeves’ goal to raise £40bil has three core purposes:
To plug a £22bil budget void she says her Tory predecessor left her, to spend more on the National Health Service and ensure no other government departments face a real-terms decrease in funding, and to meet her main fiscal rule, that day-to-day spending should be covered by taxes, with room to spare in case of an emergency.“Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met,” Reeves said ahead of the budget.
But Reeves’ tax increases are in tension with her core goal of spurring economic growth. She’s preparing to increase capital gains tax, inheritance tax and national insurance bills for employers.
“She’s going to get a lot of stick from the right-wing media,” Nottingham University’s Fielding said. — Bloomberg
