Rachel Reeves offers hard truths and hard solutions in hard places

Rachel Reeves has been in office for not quite one month and in that short time she has ripped up planning regulations, discovered a £22bn “black hole” in the public finances, and coined a new chancellorial mantra: “If we cannot afford it, we cannot do it.”

It is a statement of intent, if not a threat, that the next few months will be fairly bleak. In a sober statement on “the public spending inheritance” (or “mess” for short), she made it plain that tough times lie ahead.

There is a lively argument about what was already publicly known about the public finances and what has come to light since she came to power. The shadow chancellor, Jeremy Hunt, put up a surprisingly robust defence of the last government’s (ie his) record, and on the detail; but there is no doubt that the pressures are acute, and action must be taken.

The single most politically explosive decision prefigured by the chancellor is undoubtedly the reform of the winter fuel allowance, drastically limiting eligibility to only those on pensions credit (that is: only the very poorest).

Those elderly people close to the poverty line and already struggling with near record-high energy bills will be badly hit by this change. The chancellor would be well advised at this relatively early stage to consider alternatives to this particular measure.

It is her choice, and in this case, not one that can be reasonably laid-off onto the Conservative administration.

At a time when the government faces opposition within her own party on child poverty, she may regret opening up old arguments about pension poverty.

That said, the tenor of Ms Reeves’s statement comes as no surprise. And for good reason: Covid-19, the energy crisis and political incompetence mean the public finances are in a bad way.

After several years during which the Labour Party veered into the economic avant garde, the present leadership has rightly made fiscal responsibility its central theme. In the general election, Keir Starmer and Ms Reeves were rewarded for their efforts by the electorate.

Sir Keir and Ms Reeves argued throughout that the stability of Britain’s public finances is the essential pre-condition for the success of the first Labour administration since 2010. Without such a foundation, all their ambitions for expanding the economy, improving public services and improving the living standards of the people simply cannot be met.

As Ms Reeves points out, the short-lived Truss government was a sharp and painful reminder of what happens when such prudence is abandoned, though it is fair to add that the 2022 mini-Budget was only the most recent example of when a prime minister and chancellor embarked on a reckless dash for growth, only to for it to end, inevitably, in crisis and political tears.

Indeed, the widespread scepticism about the spending plans set out by the then chancellor, Mr Hunt, eroded the trust that he and Rishi Sunak had clawed back after the Truss experiment.

Ms Reeves, one of the most economically literate chancellors since the war, understands these lessons of history full well. She is right to want to place the public finances on a secure footing – and, as she promised, “to level with the public and tell them the truth”.

Some of the more heroic assumptions about future public spending made by Mr Sunak and Mr Hunt were being questioned before and during the election campaign, so it is not quite fair for Ms Reeves to suggest that everything that she and her colleagues discovered when they took over has come as a terrible shock to them.

However, it is obviously the case that an opposition, like the think tanks, can only discern so much about the public finances from the outside.

Now, with full access to the civil service and a comprehensive “audit” of current and potential expensive calls on the Exchequer, Ms Reeves can present a sobering assessment of what needs to be done to prevent the public finances spinning out of control. In short, she proposes a “kitchen sink” combination of public spending cuts and tax increases to deal with these looming contingencies. None are cheap.

A final settlement of the junior doctors pay dispute will require a 22 per cent increase in salaries; billions more will be required to deal with immediate crises in the public services, as well as the potential bankruptcy of Thames Water, some universities and local authorities – all going way beyond the in-year overspends outlined by Ms Reeves.

Reforms to capital gains tax and recasting tax relief on pensions contributions won’t break manifesto pledges and should help provide the funds to deal with these challenges; but painful decisions on pausing public investment programmes have become inevitable. It’s not going to be popular, and Ms Reeves is wise to want to get these moves out of the way early.

The framework for improved fiscal credibility the chancellor proposes will also bolster her drive to make Labour once again the party of economic competence – a stronger Office for Budget Responsibility and the new Office of Value for Money are highly welcome “guard rails”.

Looking to the course of this parliament, Ms Reeves will face one of her biggest challenges in trying to strengthen the public finances at the same time as meeting her party’s “mission” to grow the economy, including the brave manifesto promise “to secure the highest sustained growth in the G7 – with good jobs and productivity growth in every part of the country making everyone, not just a few, better off”.

Every major road, rail and other infrastructure project postponed or cancelled will reduce the future productive capacity of the UK economy – and with it the prospect of higher wages, better public services and generally rising living standards.

Post-Brexit Britain needs all the investment – public and private, from home and abroad – that it can possibly pump into raising productivity and securing its industrial future. Ms Reeves said nothing about the principle, embraced by many of her predecessors of all parties, of borrowing to invest.

If Ms Reeves judges that the overall level and trajectory of public debt makes funding such projects impossible, then she may have to – to borrow her own words – level with the public about her growth targets. Better still, she should look again at raising the right kind of taxes (such as on the polluters) and making her borrowing rules more investment-friendly.

She surely cannot look forward to delivering the “decade of renewal” she promises without applying even more of her formidable intelligence and creativity to focusing her Treasury on “our number one mission: to grow our economy”.