Somebody should establish a Society of Current, Aspiring and Former Treasury Ministers (“SCAFTM”). We would gather to compare notes on the parlous state of the public finances, the evils of inflation, the impossibility of meeting every spending demand and the irresponsibility of unfunded tax cuts. You may be thinking that this does not sound like a bundle of laughs, but many of us would be in our element. (Membership would be rather selective; Kwasi Kwarteng and Liz Truss would not be invited to join.)
This thought occurred to me while watching the shadow chancellor, Rachel Reeves, and the financial secretary to the Treasury, Victoria Atkins, being interviewed on last Sunday morning’s broadcast round. Of course, both of them wanted to criticise the other party but there was more in common between them than either would want to acknowledge.
For Reeves, her task was to demonstrate that Labour could be trusted with the public finances. She was at pains to emphasise that she would not take risks. Debt falling as a percentage of GDP, for example, was a bigger priority than spending £28bn a year on the Green Prosperity Plan.
The principal message from Atkins was that the government’s priority was to reduce inflation and that meant it was not able to loosen fiscal policy. Nobody should expect tax cuts anytime soon.
Both Reeves’s discipline on spending and Atkins’s rejection of tax cuts (in line with both Jeremy Hunt’s and Rishi Sunak’s recent interventions) make sense in the current inflationary environment, but it will dismay those colleagues who believe the way to unlock growth is through bold fiscal policies. If only we were prepared to borrow more to “invest in public services”/“reduce taxes on enterprise” (delete as applicable) we would grow our way out of trouble, according to some voices in both parties.
It is not just about policies for growth. Winning elections usually requires an attractive retail offer – some goodies to promise the electorate. Neither the economic reality nor the parties’ current rhetoric is likely to allow any such goodies to be promised in a 2024 election campaign.
Of the two main parties, it is the Conservatives – trailing far behind in the polls – who are the more desperate. This makes it harder to hold the line. Having said that, the memory of the Truss administration should be sufficiently fresh to discourage the belief that tax cuts are a cure-all. At least until the Conservatives go into opposition.
There are echoes of the period before the 2010 general election. A longstanding government is politically exhausted and the opposition are heavy favourites to win; we have found ourselves poorer than we thought we were (in 2010 because of the global financial crisis, now because of Brexit, Covid and Russia’s invasion of Ukraine); and the country is going to have to adjust to the new reality which means a combination of spending less, taxing more and finding ways of delivering higher economic growth.
I was part of the opposition Treasury team in 2010 and we embraced the situation. Warning of tough measures to come came at a political cost (our poll lead fell significantly in the four months before the election as Labour warned of “Tory cuts”) but it also helped establish our economic credibility and the sense that it was the opposition, not the government, which was being honest about the plight of the country. It also meant that, when in power, we had a mandate to address the public finances.
The challenges facing Reeves are arguably greater than those facing George Osborne in 2010. Back then, public spending had grown faster than the economy for a decade; public sector pay had fared much better (or, to be precise, less badly) than private sector pay after the financial crash; and the wider Conservative movement was reconciled to a period of austerity.
Now, the spending plans that Reeves is likely to inherit are tighter than is credible, not least because public sector pay is increasingly uncompetitive and not compatible with delivering the quality of public services that the electorate as whole (and Labour voters in particular) would consider acceptable. Labour, after all, has spent 13 years condemning austerity as an unnecessary choice, which is not ideal preparation for maintaining fiscal restraint in office. Even if Reeves demonstrates real toughness, she will not be able to stick to the current unrealistic spending plans. Taxes are still likely to have to rise.
In fairness, the same point applies even if the Conservatives somehow retain office. In practice, the differences in fiscal policy between the two parties’ frontbenches are not great. Both prioritise fiscal credibility over expensive offers to the electorate; both are willing to disappoint elements within their own party wanting greater boldness; but both shy away from the full truth on taxes. And neither has a compelling plan for higher economic growth (although Labour has a more growth-friendly planning policy).
The good news for Reeves is that she is on course to be chancellor. The bad news is that it will be a challenging time to be in office. What is now considered to be reassuringly cautious will be criticised – often unfairly – as being insufficiently radical. Her popularity in the country and the party will be tested. But at least she will have the sympathy of fellow members of SCAFTM.