In a recent pre-Budget speech at Downing Street, Rachel Reeves, the UK’s Shadow Chancellor, delivered a stark warning regarding the nation’s economic productivity. She announced that productivity is weaker “than once believed,” amplifying fears about what that could mean for our public finances. Reeves argued that this decline would result in reduced collections on the tax side, making it more difficult for her to follow through on spending rules.
On 31 October, the Office for Budget Responsibility (OBR) wrote to the Treasury telling them how they were getting on. The OBR continues to remain on course to meet its core rule of no borrowing for current spending. The forecasts indicate a £4.2 billion hole. This is a far cry from the £9.9 billion of “headroom” that Reeves calculated for this time last year. This revelation piles on pressure as Reeves continues to find his economic footing ahead of the Budget, shedding further dashlight onto the tunes.
On 10 November, Reeves had a remarkable interview on BBC Radio 5 Live. Throughout the course of the interview, he implied that he would be open to increasing income tax rates. She also stressed the importance of addressing the long-term fiscal outlook of government. She retreated from the planned tax increase as pressure mounted on her. Her original budget proposal called for an astounding £26 billion in tax hikes. She largely intended to do this by freezing income tax thresholds for another three years, slowly moving millions of people into higher rate tax bands.
Critics say that Reeves missed the mark by a long shot. They think increasing wages might balance out the productivity issues she zeroed in on the most in her economic forecasts. Sir Mel Stride, the Conservative shadow chancellor, said Ms Reeves was “absolutely wrong” and was not giving the full picture. He accused her of having painted an exaggeratedly gloomy picture of the public finances as a “smokescreen” to release tax hikes.
“It was all a smokescreen. Labour knew all along that they did not need to raise taxes and break their promises.” – Sir Mel Stride
The Prime Minister’s spokesperson defended Reeves, stating, “As she set out in the speech that she gave here (Downing Street), she talked about the challenges the country was facing and she set out her decisions incredibly clearly at the Budget.” This assertion aimed to counter claims that Reeves misled the public regarding the state of finances prior to the Budget.
Reeves addressed those criticisms head on in a recent interview with The Guardian. She has made clear her commitments to transparency and accountability in fiscal matters. She stated, “What I want people to understand ahead of that Budget is the circumstances we face.” She acknowledged the need for serious talks on income tax and National Insurance lying ahead. She noted that they are critical, pointing to the unpredictability plagued by productivity downgrades.
So, despite her efforts and her confidence, Conservative leader Kemi Badenoch has demanded Reeves’ resignation, claiming she has given false information to the public. The scrutiny intensified as Sir Mel Stride pointed out that Reeves did not account for the OBR’s forecast indicating higher wages would positively influence her budgetary constraints.
“We did look, as everyone knows, at income tax and National Insurance, that was a responsible thing to do because we didn’t know the size of the downgrade, the productivity.” – Rachel Reeves
Treasury officials have understandably backed away from speculation on how these factors affect internal decision-making processes. This decision is particularly welcome as they gear up for the next Budget. A Treasury spokesperson remarked, “We are not going to get into the OBR’s processes or speculate on how that relates to the internal decision‑making in the build‑up to a Budget.”