The toughest job in politics is usually said to be the leader of the opposition – an impression that Kemi Badenoch’s tenure has done nothing to dispel. But it is arguably rivalled by that of chancellor. Every incumbent since the 2008 financial crisis has faced a version of the same dilemma: the UK is a poorer country than it once expected to be.
At last year’s Budget, Rachel Reeves escaped her fiscal straitjacket through two manoeuvres: she raised taxes by £41.5bn and loosened her debt rules to increase investment. The Spending Review is the moment at which the Chancellor gets to distribute the bounty that resulted.
Reeves has already launched a pre-emptive strike against critics who liken her to the flinty George Osborne. A graph shows how Labour’s spending far exceeds that planned by the Conservatives before the election (one aide calls it “the honesty chart”). This isn’t just spin: Reeves intends to increase day-to-day spending by £190bn – the biggest real-terms rise since Gordon Brown occupied the Treasury in 2000 – and capital investment by £113bn. Austerity this is not.
But two things can be true. Yes, overall spending is rising by £303bn but some must lose in order that others may win. The latter includes the NHS – which has secured a 2.8 per cent real-terms rise – and defence (even if plenty regard 2.5 per cent of GDP as inadequate). Ed Miliband’s energy security department will enjoy a large increase in capital investment including on nuclear power (allies point to the Energy Secretary’s long-standing support for the sector as part of “the sprint for clean energy abundance”).
Other departments, however, face average real-terms cuts of 0.3 per cent to day-to-day spending. Hence the fraught negotiations of the last week.
Angela Rayner – that former trade union negotiator – reached a settlement with Reeves last night having warned that cuts to affordable housing would render Labour’s target of building 1.5 million new homes impossible. Yvette Cooper – who knows her way around the Treasury as a former chief secretary – is still holding out. After public dissent, the police will receive a real-terms increase but this will entail cuts to other Home Office areas.
Last week I detailed Andy Burnham’s rhetorical fusillades against the government. This week it’s Sadiq Khan who is unhappy, with concern inside City Hall that Reeves will announce no new projects or funding for London at the Spending Review (key demands include Docklands Light Railway and Bakerloo line extensions, a tourist/visitors levy and a significant rise in funding for the Met Police). “We must not return to the damaging, anti-London approach of the last government, which would not only harm London’s vital public services, but jobs and growth across the country,” one person close to the Mayor tells me.
Here is further evidence of why some inside government believe that Reeves needs an “economic reset” – abandoning her tax lock or further loosening her fiscal rules. But the Chancellor will have a message for such critics in her speech, which aides describe as a chance to “re-educate” these errant foes. Rewriting the UK’s fiscal rules, Reeves will warn, would not be a cost-free choice, but one that would entail higher borrowing and higher mortgage rates.
An ally speaks of a “terrifying” gap between a commentariat that pleads for more taxes and more borrowing, and a much more sceptical electorate. “They think we tax too much, they think we borrow too much, and a lot of people probably think we spend too much.”
The Chancellor is seeking to pull off a tricky double act – assailing those who accuse her of austerity while reassuring those who fear Labour profligacy. This week will test whether she can keep her balance.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Rachel Reeves wants to level up your commute. Does she have the money?]
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