Rachel Reeves will be relieved that the international excitements of the past weeks have taken the glare of attention away from her upcoming trial: a Spring Statement on 25 March, which is a de facto admission that Britain’s economy is still in slumber mode.
At the same time, the Government needs to ramp up defence spending, adding another burden to the books, not to mention the inflation figures, which are stuck at three per cent – well above the declining Eurozone average.
Crucially for a Chancellor who defined her appeal as a staunch reliability – a Labour Iron Lady to contrast with the wild swings of her Tory predecessors – Reeves needs to make the cuts and tighten the corset on welfare outgoings to keep within the spending limits she herself imposed on her party to reassure the electorate that Labour was fiscally responsible.
All of this without mentioning the T-word. The Government was shaken by the reaction to last autumn’s Budget, where hefty business tax rises, which have given employers pause before hiring more workers, led to downsizing in retail and hospitality; it was a Budget that cost Reeves the trust of the City.
Too many of the people Reeves hoped to woo – from inward investors to sectors like insurance and fin tech – have cooled on Britain as a base or destination. In short form, as far as sceptics are concerned: new faces, same old Labour.
Reeves knows that her longevity as Chancellor, and indeed the Government’s wider wellbeing, is connected to showing that she can balance out these concerns in the Spring Statement. Hence her remark in an interview with Sky News that her last Budget was a “once in a generation sort of thing”.
In truth, this is becoming a more testing reassurance to deliver: yesterday is a long time ago in today’s eventful world and the rise in outgoings for defence at 2.5 per cent is only the beginning of the story. When an incoming German government, headed by a staunch fiscal Conservative in Friedrich Merz, ramps up his country’s contribution via a large “special funding mechanism”, the trend will be clear – more is going to be needed to fulfil Starmer’s promise that the UK will be a major player in the security of Europe.
At the same time, Reeves has a window of opportunity for swingeing change. The major impact will be felt in tightening welfare spending on working-age people, which has ballooned from £48.5bn in 2023-24 to £75.7bn in 2029-30. Prodding more people on long-term sickness benefits, or youngsters not in work or training, to get economically active or lose income is now a priority.
Sensitive territory therefore lies ahead for a party which not so long ago talked about “cruel” Tories over their handling of the poor. In the short-term, Labour cannot afford sophisticated welfare-to-work schemes; and support for the large number of people who are registered as unable to work because of conditions like anxiety and depression is not well established, nor remotely consistent across a stretched NHS. So removing entitlements is the main lever that the party has to squeeze people into seeking – and staying in – jobs.
square IAN BIRRELL
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Read MoreThe classic Starmer-Reeves recipe in their approach to public finances is to make a lot of people a bit unhappy. So the welfare-to-warfare spending push will likely be offset by measures which do not contravene the hardcore pledges not to raise key taxes. Jeremy Hunt was mocked as the “fiscal drag” artist for his reliance on quietly freezing tax bands to bring in more tax revenue as inflation rose. Expect a tribute band performance from his successor.
Tax-free savings are another piggy bank to raid; curtailment of ISA savings limits has been so heavily trailed that some cut looks imminent. But how much dare Reeves raid? Middle Britain outrage at the dwindling of rainy-day pots will be noisy – and it is a lot less clear that pushing savers towards investing in shares, many of which are reliant on funds which benefit companies outside the UK, is a calculation that will come off.
In many ways, a Labour government is going to look a lot more Tory in the next months. Even the “austerity 2.0” description once resisted by ministers is now greeted with sombre reflection that the situation has changed and unthinkable things are now the norm.
In fairness to Reeves, a plan for a “bonfire” of City regulations in an attempt to lure more venture capital to the UK has been in the works for a while. It is part of a recognition that the UK economy will not have Lazarus recovery based on incremental measures and steadiness. The result is that a Chancellor (and PM) who started out preaching caution now has to discover and implement radical shifts which carry more risk or unintended consequences – or simply add to confusion about the Government’s direction.
Up till now, the recipe was based very largely on blaming the previous management. That is no longer enough: big, persistent problems are Labour’s to solve. Tellingly, the Chancellor met the major gilt (government bonds) dealers in the Treasury last week, explicitly to reassure them she would keep a tight lid on public spending, rather than being seen to risk a rise in the cost of borrowing. It is a sign of her methodological approach, but also the level of concern in the Treasury at the impact of this statement and what it foretells.
This statement is a Budget, just without the flummery – but all of the jeopardy for the Chancellor who delivers it.
Anne McElvoy is host of the Power Play podcast for Politico
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