Might Rachel Reeves have lost Labour the next general election?

Paul Montague-Smith, senior counsel – public affairs at MRM, analyses the potential fallout from the Chancellor’s budgetary promises and the political ramifications for Labour’s future prospects.

Could the Chancellor’s most recent commitment cost Labour the next election?

What kind of question is that, you might ask, less than six months into the new Government? Might it be because of the doom and gloom mongering leading up to the Budget? Or the Budget itself, with accusations of broken promises on national insurance and changing the rules on public debt to allow much more borrowing and spending? Or the changes to inheritance tax, prompting family farmers to grab their pitchforks and run to their tractors in protest?

No.

Geoffrey Howe, George Osborne and other chancellors have taken unpopular decisions at the beginning of their terms, having to ride out storms until the seas settle and the sun eventually emerges.

Rachel Reeves has certainly been feeling choppy waters. Business after business has been coming out saying how much the national insurance changes will cost them and what it will mean for jobs, investment and prices. The forecast short and medium-term impacts of the Budget – continued slow growth, slightly inflationary, delaying anticipated interest rate cuts – certainly jars with Labour’s mission to deliver a step change in economic growth. The Chancellor hasn’t had a comfortable time of it.

How you manage political storms like this can be a make-or-break test for a government. In entering the lion’s den of the CBI annual conference this week, the Chancellor has tried to draw a line under the post-Budget criticisms by saying the measures were essential to stabilise the public finances and that there will be no more tax rises or borrowing in this parliament. It’s this commitment, made under pressure, that could cost Labour the next election.

Despite the £40bn tax-raising Budget, huge spending commitments mean that the Chancellor’s forecast headroom of £15.7bn by 2030 remains wafer thin compared to expected public spending of around £1,500bn. When Harold Macmillan was asked what the greatest challenge for a statesman was, he replied: “Events, dear boy, events”. Higher interest payments on government issued debt (already nearly £105bn a year) could easily eat into the wafer. More military support needed for a struggling Ukraine. Local councils going bankrupt (one in four are expected to need emergency government support). It won’t take much to blow things off course.

History says the likelihood of current forecasts being accurate is extremely small.

With a commitment not to increase taxes or borrowing, unless that promise is broken any required re-adjustments would have to come from cuts in spending. The Chancellor also said that public services will now have to live within their means for the rest of the parliament. The real terms increases in day-to-day spending announced in the Budget are front-loaded – 4.8 per cent this year, 3.1 per cent next year, then 1.3 per cent for the next three years. The growth in capital spending is also heavily front-loaded. If action is needed to balance the books in a couple of years, the Government runs the risk of an enforced ‘return to austerity’ (which it promised to avoid) or cuts in investment (which it argues is crucial for delivering growth). Just like in the run up to the election when it rules out changes to the main taxes, the Government may just have painted itself into an uncomfortable corner. In trying to ‘move on’ and appease the business community, the Chancellor might have just bet the house on red, with a 50/50 chance of failure.

In the policy space the Chancellor and her team are pushing forward across numerous fronts. A ‘Financial Services Growth and Competitiveness Strategy’ will be published in the Spring, for which it has published a call for evidence (which closes 12 December). The interim report on Phase 1 of the pensions review, published alongside the Chancellor’s Mansion House speech, confirms proposals for a major consolidation of DC and local government pension schemes. The aim is to unlock billions of pounds of new investment for the UK economy and boost returns for savers. Whether it will do this is debatable. Some funds have committed to directing a specific proportion or amount of their investments to the UK. How many will follow is uncertain and the Government is leaving the possibility of mandating on the table if the change hoped for doesn’t materialise. It has also now confirmed that it will implement the previous government’s proposals for regulating crypto assets in full, including issuance of stablecoin, with draft legislation being consulted on as early as possible next year and the FCA having published its planned roadmap towards regulation. The Mansion House speech also confirmed plans to drive forward the Advice Guidance Boundary Review, with an FCA consultation on pensions due by the end of December, as well as a consultation to support investment into activities aligned with sustainability goals and to mitigate greenwashing.

As ever in financial services, a lot of issues to get to grips with and engage on!