Reeves sets apart Labour’s fiscal approach from the Tories’ and signals more borrowing

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Good morning from Liverpool. Rachel Reeves delivered her speech yesterday, grinning like someone who had been shown internal polling showing that the government had overdone its “it’s midnight in the United Kingdom” positioning. More importantly, she has opened the possibility of tweaking her fiscal rules so they do not constrain capital spending.

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These are my fiscal rules. If you don’t like them, I have others

Rachel Reeves said two things worth noting in her conference speech yesterday. Here’s the first.

Because I know how much damage has been done in those 14 years, let me say one thing straight up: there will be no return to austerity.

Conservative austerity was a destructive choice for our public services — and for investment and growth too.

Now, “austerity” is one of those words with an incredibly clear dictionary definition whose political definition has been stretched to breaking. The “austerity” in Clement Attlee’s Labour government referred to the very tough costs that households were asked to bear when it came to their own consumption, thanks to the continuation and expansion of rationing. As chancellors, Geoffrey Howe largely did it by raising taxes while George Osborne largely did it by cutting spending.

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But Reeves is not stupid, and she knows that if she were to turn around and go “aha! Well, yes, I might be cutting spending but I am not introducing rationing, so it is not really austerity” it would not go well for her. So I think we should read this as referring to “a return” to the most recent form of austerity, ie spending cuts. Reeves also made another significant statement later in her speech (the key sections are bolded):

My budget will keep our manifesto commitments.

Every choice we make will be within a framework of economic and fiscal stability. You’d expect nothing less.

We said we would not increase taxes on working people, which is why we will not increase the basic, higher or additional rates of income tax, national insurance, or VAT.

And we will cap corporation tax at its current level for the duration of this parliament.

This is even more explicit: the self-denying ordinances that Labour made on tax in opposition are here to stay.

Reeves used her speech to open up the flexibility for more borrowing on capital spending and infrastructure such as roads and hospitals (Sam Fleming examines her options for rethinking the government’s fiscal framework here). Now, as I have said before and will say again, the UK’s fiscal rules are very badly designed. One requires overall public debt, including investment, to fall between the fourth and fifth year of the official forecast. A consequence of that is they allow the chancellor to claim that their plans add up as long as they can have something that is theoretically deliverable in the last year of the parliament.

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I use the word “theoretically” quite deliberately — there was never any prospect of the former government, led by Rishi Sunak and Jeremy Hunt, delivering their proposals alongside their commitment to shrinking the state in the ways required for them to stick within their spending limits. But those plans did, at least, pass muster with the Office for Budget Responsibility.

Reeves told us that investors who had bought UK government debt in the expectation of making a profit were almost certainly right. The chancellor also signalled that more borrowing on infrastructure and capital spending was coming, and that tweaks to the UK’s fiscal rules to enable this would be a big part of the Budget. Depending on what the OBR believes will be the impact of greater spending on infrastructure on the public finances, she may yet be able to avoid some of the lose-lose decisions on tax-and-spend that have spooked voters and investors.

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