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Although Rachel Reeves takes advice from all her predecessors – including George Osborne – she models herself on Gordon Brown the most.
Brown, the UK’s longest-serving chancellor, prided himself on his prudence. “Prudence with a purpose” was one of his slogans andThe Prudence of Mr Gordon Brown was the title of William Keegan’s 2003 book about him, written as its subject prepared himself (prematurely) to move next door to No 10.
But Brown’s prudence was mostly accidental. He did not realise how golden his inheritance from Ken Clarke was. The government accounts were heading into surplus – a rare condition in British economic history in which revenue exceeds spending – but Brown’s achievement was to allow Clarke’s prudence to bear fruit. If you define prudence as refraining from blowing the inheritance on a spending spree, Brown was prudent in his early years.
He didn’t keep it up, though. And by the time he eventually left the Treasury for the top job, the public finances were less well prepared for the shocks to come than they could have been.
Reeves doesn’t have the advantage of that generous inheritance. Jeremy Hunt may protest that she has exaggerated the awfulness of the public finances that he bequeathed her, but it is safe to say that he was not heading for a surplus on 4 July. So her task was always going to be harder than Brown’s – and no wonder she has had such a rough reception for her decisions so far.
Of course, every chancellor has fifth-quarter quarterbacks telling them what they should have done after the event, but it is notable that the cut in pensioners’ winter fuel payment is now universally regarded as a mistake – including in No 10.
Everybody can be their own chancellor and go on the Institute for Fiscal Studies website to draw up a Budget: it is easy enough to find a replacement for the £1.4bn a year saved by means-testing the winter fuel payment – if petrol duty had been raised in line with inflation, for example, that would have yielded £3bn a year.
I have less patience with those who airily describe the rise in employers’ national insurance contributions as the wrong decision, without explaining how they would find £25bn a year instead.
One of the few critics I respect, though, is a senior figure of the Brown Treasury, who told me that the winter fuel cut should have been “buried” in the Budget, instead of being announced separately. This person’s view was also that a large portion of the revenue from the tax hike on employers could have been raised by curbing the tax relief on better-off people’s pensions instead.
“It is important to encourage people to save for their pensions,” they said, “but most of the work for the lower-paid is done by auto-enrolment.”
Once everyone has played around with the IFS’s “Be the Chancellor” website, however, it should be clear that, although Reeves could have made slightly different and better decisions, the broad outline of her policy was unavoidable – and that any alternative policies would have had downsides and would have been unpopular with a slightly different or overlapping group of taxpayers.
Reeves’s hope was that her decisions in July and October were “prudence with a purpose” – that once the hard and unpopular choices were made, they would not need to be revisited, and that in later years she, and the nation, would reap the benefits.
The progress of the spending review so far suggests that she will be disappointed.
She and Darren Jones, the chief secretary to the Treasury, are currently negotiating with spending departments the plans for the years after April 2026, which she will announce in the “late spring” of 2025. The IFS has just published an analysis that explains why these negotiations are so difficult.
In her Budget in October, Reeves increased spending this year and next to deal with the immediate pressures inherited from the Conservatives, but then set what the IFS diplomatically calls a “pretty tight” limit on total spending for later years. Whitehall departments are now fighting for their share of that total.
The Independent quoted Carl Emmerson of the IFS on Friday on Labour’s target of being the fastest-growing economy in the G7 by the end of the parliament: “She might get lucky: it’s possible growth will exceed the Office for Budget Responsibility’s forecast. But equally, she could get unlucky. And I guess we don’t have much of a sense of what she would do.”
The fastest growth in the G7 was always not just pie in the sky but pot luck in the sky, depending on the performance of other countries, including the US. But Reeves needs that higher-than-expected growth to make her spending plans credible.
This is the opposite of prudence. Whereas prudence means preparing for unexpected negative shocks, she has gambled her reputation on growth turning out better than the forecasts.
She is fortunate that there is no obvious alternative candidate as chancellor – apart from Jones, her number two, who is currently making himself extremely unpopular with his cabinet colleagues by saying no to their spending bids. Because my forecast is that the unexpected will happen in 2025 and that it will be bad for the public finances.
