How much can Rachel Reeves be trusted? A Chancellor’s credibility counts for a lot with the markets, who are asked to lend HM Government tens of billions a year. Reeves claims to be serious, straight and candid in a way her Tory predecessors were not. But now she seems to be channeling Liz Truss and coming up with her own assessment of the public finances while dispensing with the service of the Office for Budget Responsibility (OBR). She intends to declare a £20 billion hole, we’re told, and say she is shocked – shocked! – at what a mess the finances are in. Cue an excuse for tax rises, more borrowing or both.
Reeves claims to be serious, straight and candid – in a way her Tory predecessors were not
This would mark a big change from what she said during the campaign. ‘We’ve got the OBR now,’ she admitted then to the Financial Times. ‘We know things are in a pretty bad state. You don’t need to win an election to find that out.’ So how can she go straight from that to saying that, having won an election, she is shocked to find that things are in a pretty bad state? And why keep the OBR out of the picture when presenting an urgent reassessment of the public finances, thereby repeating the tactic deployed by Truss in her first few weeks?
Politically, it’s easy to see what Reeves up to. She wants to create her own version of the now-infamous Liam Byrne note ‘there is no money left’ and claim to have found a terrible scandal, unexpected damage that she has to clean up. But the extra cost pressures she seems to point to now were spelled out by everyone, not least the OBR just a few months ago in its March statement.
We all know about the unfunded promises for the blood transfusion scandal (~£10 billion) and a refusal to find funds for defence spending at a time of war in Europe. It’s awful, and the Tories have rightly paid a heavy price for their fiscal incontinence. But even Paul Johnson from the Institute of Fiscal Studies is pointing out that ‘there shouldn’t really be any sense of surprise that there’s a big issue here.’ Reeves will also have guessed that the independent pay review bodies would propose something like a 5.5 per cent rise for teachers, nurses etc and it’s her choice whether to go along with this rather than (as the Tories did) make it closer to inflation (currently 2.2 per cent).
Reeves wants to accuse the Tories of a ‘cover up’ and Steve Reed, the Environment Secretary, has been sent out to rehearse this argument. But the OBR system means since 2010 it has not been possible for a Chancellor to cover anything up. The OBR provides an x-ray of the public finances and tells you what the Chancellor often does not want to. If Reeves thinks too much has changed since the OBR’s last in March last year, she should be asking the OBR – not her officials in HM Treasury – to come up with an emergency analysis. The OBR has always said it stands ready to do this at short notice when needs be.
But the OBR is independent. Officials in HM Treasury will cook the figures however the Chancellor wants them to. That is why Liz Truss wanted her Treasury officials – rather than the OBR – to do her mini-Budget analysis. It seems Reeves is taking this from the Truss playbook. Not an encouraging start to her time in No11.
If Reeves turns out to be a Chancellor who bends the rules when it suits her, who makes promises to get out of a tight spot then later reneges on her word, this will taint and devalue all of her future promises. If she ends up borrowing more, tapping the markets as Liz Truss did, then her credibility with those markets will matter. Less credibility means higher borrowing costs. Reeves has asked to be taken on trust and, so far, markets have been inclined to give her that trust. She’d be ill-advised to squander it now.
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