For Rachel Reeves, good news is bad news. The past few days have seen a flurry of data suggesting that the economic picture inherited by the Chancellor is not as bad as it once looked – which risks undermining her argument that drastic solutions are needed to dig Britain out of a dire situation.
Inflation came in at 2.2 per cent, lower than economists had expected. And it emerged GDP grew by 0.6 per cent in the second quarter of the year: ironically, Labour’s election promise of the fastest economic growth in the G7 had already come true even before the party took power.
Jeremy Hunt, the shadow Chancellor, whose efforts to defend his own legacy in the Treasury has seen him gain newfound popularity among Conservative activists, was quick to accuse Labour of dishonesty and exaggeration over the public finances to justify raising taxes.
Laura Trott, shadow Chief Secretary to the Treasury, told i: “The only person not celebrating this week’s positive economic news was the Chancellor.
“A growing economy and low inflation are further proof that Labour’s claims about their economic inheritance are a total fabrication. Labour need to be honest that they are prioritising unions over pensioners, and have wanted to raise taxes all along.”
‘The economy isn’t just lines on a graph, it’s people’s lived experiences’
A source close to Ms Reeves insisted there would be no watering down of the new Chancellor’s doom-and-gloom strategy, telling i: “Taxes are at a 70-year high, national debt is the highest since the 1960s, public services are under pressure and millions of people are still struggling with the cost of living.”
She will use the run-up to the Budget on 30 October to argue that despite the improvement in economic data, most Britons have yet to benefit from the brighter picture. “The economy isn’t just lines on a graph, it’s people’s lived experiences,” the source said.
Whitehall officials are nervous about overinterpreting the impact of this week’s strong figures on the Budget, i understands, given that there are two more rounds of economic data feeding in to all-important projections from the Office for Budget Responsibility. These will determine how much “headroom” against her fiscal rules Ms Reeves will end up with.
Ben Caswell, of the National Institute of Economic and Social Research, suggested the Chancellor was right to avoid overreacting. He warned that the UK’s trend growth remains barely above 1 per cent, given a lack of business investment and persistent weakness in the labour market with large numbers of people unavailable for work.
Mr Caswell added: “In terms of the fiscal picture, Rachel Reeves still has some challenging decisions to make – it’s not an easy position to be in. The tax burden that she has taken on has been the highest in 60, 70 years, so it is tough without a doubt. And there are a whole lot of competing demands on public services – education, healthcare, social care – these things are only going to increase as well.”
Spending cuts are coming
The upshot is that the Chancellor’s threat of higher taxes at the Budget, and cuts in the spending review for 2025-26 being announced on the same day, remains very much in play. A Government source said that Chief Secretary to the Treasury Darren Jones, who is in charge of spending, was being lobbied by every Whitehall department – but warned that not all of them would be able to escape cuts.
“I would not want to be Darren Jones right now, I do not envy his job,” the insider said. But the source insisted that those ministers who lose out this year would continue to hope for a funding uplift in future because of the “10-year horizon with a five-year plan” which Sir Keir Starmer is working to.
On tax, the Chancellor’s hands are tied by her promise not to raise income tax, national insurance, VAT or corporation tax, which between them account for around three quarters of all tax revenues.
Dan Neidle, a taxation expert who previously worked as a City lawyer and now runs Tax Policy Associates, said it was possible to raise the £20bn or so needed to avoid more spending cuts by increasing a wide range of different levies – with a risk that any one of them could prompt a political backlash.
He told i: “You can definitely do it, it’s a political calculation if you think you are better taking the pain of raising one big tax or raising a bunch of little ones.” Mr Neidle pointed to limits on pension tax relief as “an easy way to raise a lot of money”, and proposed closing inheritance tax loopholes too.
Another option on the menu, he suggested, would be an overhaul of council tax. Such a move would “create winners and losers” in a politically risky way, Mr Neidle said, but a focus on charging more on the most valuable properties could avoid a crisis: “I don’t think anyone is going to weep too much about people owning £4m houses having to pay more tax.
‘They are really going to struggle to pay for it all’
Even if Ms Reeves does get a boost from GDP and inflation news, another development this week points in the opposite direction: the decision to offer train drivers at the Aslef union a 15 per cent pay hike is the latest in a string of above-inflation offers on public-sector wages designed to bring years of rolling strikes to an end.
A Whitehall source said: “They are spending so much on public-sector pay, particularly with the latest settlements with the unions, they are really going to struggle to pay for it all.”
i understands that union insiders – who are generally delighted by the access they have been granted under the new administration – anticipate further difficult decisions for ministers around local government pay offers and pressure to increase the living wage.
A source said: “Generally I think people have been pretty happy with the way they have had access to government in a way they haven’t had for years. People have been pretty encouraged by it. We have had more meetings with ministers in the past month than in the past 14 years.”
We’re asserting ourselves and it’s working, say unions
A senior figure from a different union added: “There has been quite a bit of progress. A lot of it is because the unions have put pressure on early on. It is a much more left-wing union leadership than in 1997, when the unions were very much aligned with New Labour. The fact the Government has delivered so early on workers’ rights, a lot of that comes down to the unions asserting themselves so strongly. There is a lot of expectation among Labour supporters who do not want Tory policies to continue.”
A third union source insisted, by constrast, that the Government had successfully outflanked the left who are “waiting for the first betrayal of Labour” – despite being well aware of the risk they faced in handing over so much cash to public-sector workers.
But they warned: “The real test for them and the unions is what comes next. Everywhere there are big long-term issues, they are different in different places… Almost every sector has got big issues that have not been addressed for the long term, we’ve essentially had 15 years of pay stagnation.”
And the Tories will always jump on any suggestion that it is the union bosses calling the shots. Harriett Baldwin, the Conservative MP who chaired the Treasury Select Committee before the election, told i: “The recent good news on GDP and inflation as well as a cut in interest rates shows what a strong economic legacy the new Government has inherited.
“The hard yards were done by Jeremy Hunt as chancellor. I hope the new Government does not squander this good economic inheritance by handing above-inflation pay rises to their union paymasters without asking for any productivity improvements.”
