Rachel Reeves' speech might set the tone for the rest of her time as Chancellor

Rachel Reeves is giving an important speech tomorrow, one that could set the tone for the rest of her time as Chancellor. 

Some of the speech is entirely predictable. She’s going to stand up and complain about the mess left for her by the last lot. Some reports suggest she may reveal a £19 billion black hole in the public finances.

The claim that Labour have inherited the worst set of economic circumstances since the Second World War is overdoing it, but when it comes to the public finances, Reeves has a point. Debt is high. Higher interest rates mean we have to spend more servicing that debt. The economy is stuttering, not booming. Taxes are at record highs, yet public services are struggling – the worst of both worlds. 

We can also expect Reeves to make a great deal of the dire state of public services. Again, she’ll have a point. The NHS backlog now stands at 7.6 million, up from 4.4 million at the time of the last election. Worryingly, it has started ticking up again in the last few months. The prisons are full. The courts are creaking, and in some cases leaking. Councils are struggling to provide basic services. Schools are struggling to cope with a sharp rise in the number of pupils requiring support with special educational needs. The Home Office is spending a small fortune housing asylum seekers. The list goes on. 

None of this should have come as a total surprise to the Chancellor. Some of it may well be a bit worse than she anticipated. There are undoubtedly things the government knows that we don’t. But there was never any doubt about the difficult inheritance awaiting her. 

Which brings us to the real purpose behind Monday’s speech. It’s about buying political cover for what comes next. 

Let’s be frank: public services are going to need more cash. Pay review bodies are recommending pay rises of between 5 and 6 per cent for teachers, nurses, and other public sector workers. But departments have budgeted for more like 2 per cent. Rejecting those recommendations would almost certainly trigger strikes. Accepting them could come with a price tag of as much as 10 billion pounds.  

Then there’s defence. As well as the direct cost of supporting Ukraine in the short term, there’s the promise to eventually increase defence spending to 2.5% of GDP. That’s not cheap. There’s the promise to eliminate all NHS waits of more than 18 weeks. That won’t be cheap either. We’re almost certainly going to need to build more prisons. The new childcare subsidies for working parents need to be paid for somehow.

I could go on. The point is, public services are in a mess, and there’s a hole in the spending plans for this year and beyond that was going to need filling sooner or later. The question then becomes: where is the money going to come from? 

In the longer term, the hope is that planning reforms, infrastructure investment and other growth initiatives will unlock the much-needed funding. But those policies, however well-designed and well-executed, will take time to pay off. And Labour have got problems that need attention in the here and now. 

So, what are the options? Borrowing, perhaps. But the government can’t borrow too much more without bumping up against its “iron-clad” fiscal rules – the rules the Chancellor assures us are non-negotiable. 

Which leaves taxes. Here, too, the Chancellor has limited her options. She has ruled out future increases in income tax, national insurance contributions, VAT (other than on private school fees) and the main rate of corporation tax. In other words, the biggest revenue raisers. What’s left? 

There are persistent rumours that she’ll look to raise more from capital gains, by taxing income from property or shares at a similar rate to income from work. She may look to raise more from inheritance tax, where scrapping some of the reliefs for businesses and agricultural land could raise a billion or two. She could raise a bit by paring back some of the overly generous aspects of pensions tax relief. She could extend the freeze in income tax thresholds by another year without breaching the letter of her promise. The Treasury will no doubt have prepared a long list of possible revenue raisers, some more stealthy than others. 

The speech on Monday is unlikely to spell out any of this in detail. But it might be a recognition of the fiscal reality. Better late than never. 

This article was first published in The Sun, and is reproduced here with kind permission.