Rachel Reeves is making clear that Labour’s promises of fiscal responsibility have lasted about as long as the second West Indies innings at Trent Bridge.
The Chancellor may not have explicitly told Laura Kuenssberg that she was planning to cave to recommendations of a 5.5 per cent pay rise for teachers and NHS workers, but she did suggest there was a “cost to not settling” in strikes and staff retention issues. Today’s papers were brimming with suggestions that she is going to fold. Similar deals are projected across the public sector.
The Institute for Fiscal Studies calculates that a 5.5 per cent pay rise for teachers and NHS staff would cost £5.5 billion, rising to £10 billion if given to all public sector staff. Not only is that well above the current 2 per cent rate of inflation, but it is far ahead of the 3 per cent previously budgeted for.
How will this new hole in the public finances would be plugged? Borrowing is already running ahead of OBR forecasts. Reeves will hardly want the first Labour Budget in fourteen years to focus on public spending cuts. So the Chancellor will hope she can get away with better-than-expected growth, or copying Jeremy Hunt’s trick of punting cuts forward five years on a rolling basis.
But if Reeves doesn’t get so lucky, tax rises beckon. I warned only three weeks ago that the Conservatives would be vindicated in warning about Labour’s ‘tax bombshell’. Reports had suggested Reeves was pitch-rolling for a spending review that would suggest the public finances were in a worse state than expected, and that hikes in inheritance and capital gains tax were coming.
The recommendations of the pay review boards benefit Reeves by suggesting the increases are out of her hands. She can suggest the Tories were conscious that these pay problems were coming and skedaddled before they had to tackle them. Solemnly, she will take to the dispatch box, lament her plight, and push through her squeezes. Here I stand – the OBR says that I can do no other.
Conservative claims of duplicity will fall on deaf ears, unnoticed by an electorate that will assume that Mandy Rice-Davies rules apply, and are happy to have shot of us. The bar is very low for a Labour honeymoon. Reeves’s raid will be less swinging for voters than Rishi Sunak’s stealth hikes.
But whilst she may get away with paying the Danegeld this time, it sets a precedent. All those claims to have adopted the hair-shirt guise of Osbornite fiscal responsibility will have proved hollow in the face of union demands. Reeves’s hopes of having bought off the Dane are naive.
It also will prove to Labour backbenchers that money can always be found if the Chancellor wants it. Accepting the pay recommendations will be more expensive than scrapping the two-child benefit limit. Doing one and not the other is a choice on which Reeves will have taken a clear side.
Few Labour MPs are going to reject wage increases for fellow travellers in the public sector, especially if they believe the nation’s services to have been ravaged by austerity. But Reeves has fallen at the first hurdle at proving to her party that trade-offs must be made and spending controlled. Either there is more money available, or taxes can be hiked more easily than suggested.
The Chancellor will hope that the Government’s outburst of YIMBYism can deliver the significantly higher growth required to avoid big tax hikes or spending cuts. But the IMF predicts this will need to be around 2.6 per cent – three times this year’s predicted rate – to stabilise debt by 2028-2029.
Call me an old cynic, but that seems rather unlikely. Growth since the financial crisis has averaged 0.4 per cent a year. Something will have to give: Labour’s pledge not to raise income tax, VAT, or corporation tax, or their inherited fiscal rule to have debt falling in five years, or their natural desire for increases in spending. Sow the wind, reap the whirlwind, and sod the public finances.
As Jeremy Hunt pointed out yesterday, “every Labour government in history” has ended up hiking taxes, and Reeves “should have been honest about that before the election”. Whilst nobody is currently interested in listening to him, that doesn’t make his words any less true. We’ve seen this movie before.
Reeves plans a speech on Labour’s “spending inheritance” at the end of this month. If she thinks this is the worst inheritance of any post-war government, how bad will ours be when we re-enter office in five years?