Rachel Reeves is the new George Osborne. It is a common observation and not usually intended as a compliment.
There are two aspects to this analysis. The first relates to political strategy and Reeves’s determination to characterise her economic inheritance as being unremittingly grim. It is exactly what Osborne did in 2010 to Labour.
What is causing concern to Reeves’s critics on the left is that the substance of her economic policy may be closer to Osborne’s than they would like. With all the warnings of a tough Budget to come on 30 October, the Chancellor is accused of implementing austerity 2.0. Jeremy Corbyn warns of a repeat of a “failed economic experiment” to “starve our public services of resources” while Yanis Varoufakis (who really should know about failed economic experiments) says that Reeves and Keir Starmer have “embraced Cameron-Osborne’s austerity” and that “this Labour government must be challenged by progressives, especially Labour voters”.
A more measured and thoughtful critique was set out on these pages last week by Lewis Goodall. He argues that government policy “appears thoroughly Osbornite… haunted by austere fiscal assumptions” and complains that “there appears to be no Labour attempt to defend the economically sound principle of borrowing to invest”.
Is this fair or accurate? The comparison is usually made from an anti-Osborne perspective so – as someone who was part of his Treasury team throughout his time as Chancellor – let me provide an alternative perspective.
First, on the politics, there are clearly similarities between the message that Reeves is conveying – that the fiscal situation is a mess thanks to the irresponsibility of her predecessors and that tough action is required to sort it – and that deployed by the coalition government after 2010. The difference is that Osborne had been braver before a general election in making the case for tough action than Reeves has been.
Reeves, as shadow chancellor, successfully projected a sense of toughness when it came to public spending but on taxes her desire was to reassure the electorate that they would not be required to pay more. When pressed, higher economic growth would solve our fiscal woes. That is not an argument we are hearing much of at the moment.
Instead, the focus is on an unexpected £22bn “black hole” in the public finances. Almost half of this is a consequence of accepting in full the recommendations of the public sector pay review bodies (at a cost of £9.4bn). That is a perfectly respectable decision to make but contrasts with the Osborne approach, in which public sector pay restraint played a crucial role in public spending restraint. The practical reality, however, is that public sector pay restraint was more politically and economically justifiable in 2010 than it is today. It was also easier for a Tory chancellor to implement than a Labour one.
Reeves looks set to follow Osborne in beginning her time as Chancellor by raising taxes (although Reeves is doing so to spend more, not borrow less). There might also be some similarities in the taxes they increase. As concessions to his Liberal Democrat coalition partners, Osborne raised capital gains tax from 20 per cent to 28 per cent. Pensions tax relief was made less generous and the non-dom regime tightened (although Osborne was more careful not to drive them away than Reeves has been). The big revenue raiser, however, was an increase in VAT (from 17.5 per cent to 20 per cent). If you want to raise large sums of money, you need to use one of the big taxes that are paid by large numbers of people. Reeves appears to have ruled that out.
The big criticism of Reeves relates not to the details of tax policy but that she is too accepting of the fiscal constraints she inherited and that she should be willing to borrow more to invest.
As an old Osbornite, I will make three points in her defence.
First, Reeves did not make the “borrow to invest” argument in advance of the general election and she would be viewed with suspicion by the electorate if she pursued it now.
Second, those most critical of Reeves do not tend to be most focused on investment but spending. The current flashpoint is the winter fuel allowance which, whatever its merits, is not an investment that has a long-term benefit to the productive capacity of the UK economy. Without fiscal rules that bite, borrowing to invest quickly becomes borrowing to spend.
Third, maintaining market confidence matters. House of Commons leader Lucy Powell got carried away when she stated that winter fuel payments had to be cut or there would be a “run on the pound and the economy crashing”, but the UK has to avoid looking like an outlier to the bond markets. We are certainly not that at the moment but the events of autumn 2022 reminds us of what happens when we are.
That is not to say that it is impossible to square the circle and win the confidence of the markets and the electorate to borrow to invest but that confidence is not easily won. Caving in on issues of day-to-day spending – such as the winter fuel allowance – will not help.
In many ways, Reeves is not continuity Osborne. But she is operating in a world where choices are constrained and demands for public spending far exceed what is affordable. Just as difficult choices had to be made in 2010, they have to be made now. Frustrating though it may be to some on the left, the fact we now have a Labour government does not change that
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