By Alex Brummer for the Daily Mail
Updated: 17:01, 29 July 2024
Rachel Reeves, the new Chancellor, has been quick to take a stern approach to managing the public finances. But in her haste to appear responsible, she has overlooked the need for growth and investment in Britain's future.
Reeves's recent spending review, which identified a £22 billion hole in the public finances, has been met with criticism from some quarters. Notably, Labour's own shadow chancellor, Rachel Reeves, has accused the Conservatives of a spending cover-up. However, the reality is more complex.
A significant portion of the deficit is attributable to Reeves's own decisions, particularly her acquiescence to trade unions' demands for increased pay for public sector workers, including junior doctors. This, despite her earlier pledge that there would be no fiscal events without buy-in from the Office for Budget Responsibility (OBR), effectively creates a mini-budget.
While Liz Truss's tax giveaways, which targeted hard-working Britons, were met with scepticism from the markets, Reeves's concessions to the unions have been less controversial. But this apparent success comes at a significant cost.
The decision to accept the recommendations of independent pay review bodies without insisting on productivity returns sets a dangerous precedent. If private sector employers were to follow suit, it could damage profits, returns, and output at a time when Artificial Intelligence (AI) offers the potential to address the UK's long-standing productivity issues.
Beyond immediate consequences, the decision to lavishly fund public sector pay carries long-term fiscal implications. Government employees are largely the only workers who receive final salary or average salary pension benefits. This generous approach creates a financial burden for future Chancellors as public sector pensions are unfunded, relying directly on private sector taxpayer contributions.
To close the black hole in the public finances, Reeves has chosen to cut the winter fuel payment for all but the least well-off pensioners. While many pensioners may not consider the winter fuel payment essential, for those struggling to heat their homes amid rising energy bills, this cut will be keenly felt.
This assault on pensions is likely to continue. When Reeves delivers her first full budget in October, she may follow Treasury advice and curtail tax relief on private pension savings. Coupled with the mooted wealth taxes, this could stifle investment and further damage the UK's economic prospects.
While many Britons may resent the perceived concentration of wealth amongst a small segment of the population, it's crucial to recognise that the savings of the well-off are essential for driving growth and enterprise.
Taxing wealth harshly will make it even more challenging to secure private sector buy-in for initiatives like Great British Energy and a national wealth fund, initiatives which are vital for the UK's future.
Reeves's focus on fiscal responsibility is understandable, but she risks overlooking the critical elements needed to build a thriving economy. Growth, driven by housing and infrastructure investment, was a central theme during the election campaign. Yet, axing or postponing vital road and rail projects goes against this promise.
Her proposal for a new 'Value for Money' quango, while seemingly innovative, duplicates the role of the existing National Audit Office. Similarly, the appointment of a Covid-19 corruption czar to reclaim lost funds appears redundant with existing institutions like the Serious Fraud Office and the National Crime Agency already tasked with such investigations.
One would hope that Reeves, as the UK's first female Chancellor, will succeed in her role. However, her current approach lacks the vision and optimism necessary to guide Britain towards a brighter future. Her vision of a light, services-based tech economy is not backed by tangible plans or a clear roadmap for achieving this ambition.
Reeves's initial foray into public finance has been characterised by a short-term focus on balancing the books at the expense of long-term economic growth. She needs to remember that a strong economy is not just about austerity but about investing in the future.