(Bloomberg) -- UK Chancellor of the Exchequer Rachel Reeves will run the gauntlet between the left of her Labour Party and opposition Conservatives on Monday when she outlines the state of public finances.
In a speech setting the tone for the Britain’s economy and its politics for the next five years, Reeves is expected to say she’s inherited a near £20 billion ($26 billion) shortfall for public services from the Tory government ousted by Labour in this month’s landslide election win.
That black hole provides the backdrop for her first budget in the autumn, when she’s told Bloomberg “difficult decisions” will have to be made. Whether she and Prime Minister Keir Starmer respond with tax rises or spending cuts, the Tories and the Labour left are poised to pounce.
It’s a tricky balancing act, and weeks of internal deliberation have taken place about how to get the speech right, people familiar with the matter said. Starmer has used the first three weeks of Labour rule to blast its “shocking” inheritance from the Tories in areas from crime to migration, but it’s harder for Reeves to feign surprise at the fiscal picture given the open books provided by the Office for Budget Responsibility.
The scale of the challenge “has been evident for some time,” according to Ana Andrade and Dan Hanson at Bloomberg Economics. They concur that some £20 billion needs to be found by 2028-29 to prevent spending cuts in unprotected departments such as justice and local government. Pressures on defense outlays, public sector pay and welfare could see that rise higher still, they wrote, meaning “more tax hikes look inevitable.”
That’s problematic for Reeves and Starmer, who spent the election campaign repeatedly promising they had “no plans” to raise taxes beyond a select few, including on private schools, non-domiciled residents and windfall profits for oil and gas companies.
The Financial Times reported that the chancellor will delay various “unfunded” projects for new road links and hospitals to make up the financial shortfall.
Indeed, the chief concern of advisers working on the speech is to maintain Reeves’s credibility. There is broad agreement on the strategy of shining a spotlight on the Conservatives’ record, blaming them for dire public finances and any unpopular decisions Labour might have to make — inspired by former Tory Chancellor George Osborne’s approach after the financial crisis.
Yet aides have also stressed the need not to go overboard and claim the public finances are far worse than thought when Reeves told voters she wouldn’t put taxes up. Indeed, she admitted in the election campaign that she wouldn’t be able to act surprised at what she found.
Some officials argue Labour can’t announce sweeping tax rises right away to fund spending demands from the wider party.
That’s what the Tories want Labour to do, a party official said, because the opposition would then spend the whole Parliament accusing them of lying in the election campaign. Party strategists think Tory warnings about Labour tax rises could be one reason for the July 4 result being closer than opinion polls suggested, and Reeves would not want to confirm those suspicions among swing voters, another aide said.
Yet holding the line is not proving easy. Starmer and Reeves find themselves buffeted by pressures from their party to spend more on public services and fund it by raising taxes on the wealthy.
Asked at a Group of 20 meeting in Rio de Janeiro on Thursday whether she still had “no plans” to raise taxes on wealth, property or inheritance — as Labour repeatedly said during the election campaign — Reeves failed to reiterate that commitment.
An added risk is if the OBR downgrades its growth forecasts to bring them closer to those of the Bank of England and commercial banks. That would further deplete Reeves’s headroom, giving her less scope to raise spending.
While she could in theory borrow more in the short term, that would come at the risk of economic credibility. Moreover, she’s promised to adhere to fiscal rules meaning debt as a percentage of gross domestic product must start to fall within five years. She’s described them as “iron-clad,” so any change would suggest her promises are paper thin.
The internal party context of the chancellor’s speech is a parliamentary clash on Tuesday between Starmer and left-wingers. After seven members of Parliament voted for an amendment calling for more generous welfare payments for parents, the premier responded ruthlessly, kicking them out of his party for six months.
Scrapping the so-called two-child cap on family aid has become an early cause of the left, and many others across Labour also want Downing Street to act. That would cost at least £2.5 billion, according to the Resolution Foundation think tank.
Starmer’s allies insist they are relaxed about internal discussion and dissent, arguing this small group of MPs had gone beyond that and were acting in bad faith trying to undermine the Labour government.
An aide pointed to the example of Faiza Shaheen, a left-winger replaced as a parliamentary candidate by Labour at the election who then decided to stand as an independent against the party. That showed moves by the left against the party’s interests could not be tolerated, they said.
Still, the row led some ministers to privately suggest the premier had been heavy-handed. It risked creating a bigger fight with supporters of left-wing former leader Jeremy Corbyn down the line, one minister said, predicting some rebels could team up with the Green Party and independents who won seats from Labour at the election on issues like Gaza and arms sales to Israel.
Another aide suggested Deputy Prime Minister Angela Rayner, already seen as sidelined by Starmer, would struggle to support her boss in many further fights with the left.
The next flashpoint on the benefits cap is the budget, ahead of which Labour MPs plan to privately lobby Reeves to signal she will scrap it this parliament. They’re hoping she’ll raise the cap to three from two children initially, or commit to end it before the next election.
Making the numbers add up while keeping her tax promises is the unenviable task that’s been top of Reeves’s mind ahead of Monday.
--With assistance from Ailbhe Rea, Tom Rees and Philip Aldrick.
(Updates with FT report in seventh paragraph.)
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