The new season of Industry, the HBO City drama, offers a reminder of what happens when Budgets go wrong. “He didn’t even run it past the cabinet!” one character exclaims of Kwasi Kwarteng as the pound plummets.
Liz Truss’s 2022 mini-Budget proved politically ruinous for the Conservatives. But its spectre also haunts Labour. It was a reminder of a lesson that the party has been forced to learn in office before: there are hard limits to how much the state can spend and borrow.
This helps explain why Rachel Reeves’s Budget – “Fixing the foundations to deliver change” as it will be known – has been one of the most trailed in history. The Chancellor is seeking to borrow more – and she has chosen to ask the markets for permission rather than forgiveness. “Rachel recognises that Labour’s Achilles heel has always been fiscal responsibility,” Ed Miliband told me last month.
A single line in Reeves’s Labour conference speech – urging the Treasury to count the benefits as well as the costs of investment – sparked hopes of a revision to her fiscal rules. Aides promptly confirmed that this was the case. Outriders such as former cabinet secretary Gus O’Donnell amplified the argument. The cabinet and bank chief executives were briefed on the changes (“What is the alternative? More decline,” one told Reeves).
In short, the Chancellor is aiming to ensure that no one is surprised when she duly borrows more in her Budget (investors suggest up to £80bn is available). This is “pitch rolling” of precisely the kind that Labour MPs complained was absent from Reeves’s winter fuel cut announcement. “No build-up work, no explanation, awful politics,” one said then.
That move – which 49 per cent of voters name as the government’s biggest mistake – damaged Reeve’s political reputation. “It’s a hugely unpopular decision that we were under no obligation to make and it’s the canvass on which ‘freebies’ has been painted,” one insider lamented. Some believe this helped prompt three cabinet ministers – Angela Rayner, Shabana Mahmood and Louise Haigh – to bypass Reeves and write to Keir Starmer protesting against planned spending cuts.
Treasury aides, however, insist that they actively encouraged ministers to take their concerns to the Prime Minister. It was important, they say, for Starmer to independently back Reeves’s choices (a retort, perhaps, to the popular suggestion that the Treasury runs this government).
The Chancellor’s team note with satisfaction that departmental budgets – which were settled last Friday (18 October) – have been agreed far earlier than under recent Conservative administrations. Are there surprises to come? “This isn’t a Budget for rabbits,” an aide said in response to George Osborne’s suggestion that Reeves might yet include at least one tax cut alongside up to £35bn of tax rises.
Attention is now turning to the defining political arguments Labour will make in the Budget period. The first is over the government’s inheritance – Morgan McSweeney, No 10’s chief of staff, likes to quip to MPs that he will be telling his grandchildren about what “the Conservatives did to the country”.
This argument goes beyond the “£22bn blackhole” that Labour says it inherited from the Conservatives to encompass the party’s wider record: low growth, higher taxes and a decaying public realm (“the shit state” as the conservative commentator John Oxley has dubbed it). As Reeves likes to point out, had the UK economy grown at the OECD average over the past decade, it would be £140bn larger today.
The second is that the government is “gripping” the public finances after a profligate period of “vanity projects” (from the Rwanda scheme to the mismanagement of HS2). Darren Jones, the Chief Secretary to the Treasury, has announced plans to create a new Office for Value for Money and install “guard rails” to prevent wasteful infrastructure spending.
The third is that investment is the only way for the UK to escape its “economic doom loop” (under the Conservatives’ plans, public investment was due to fall from 2.4 per cent of GDP in 2024-25 to just 1.7 per cent in 2029-30). Taxes will rise and some public services, outside of key areas such as the NHS, will be “deprioritised” to enable this shift.
“Obviously the Tories will say that with any and every single tax you can make an argument that it’s anti-growth,” a Labour aide told me. “But if they think short-term tax cuts are the way to fix the problems the country faces then that’s an argument we’re prepared to have.”
A complaint often made of this government is that it hasn’t been prepared to have enough arguments. Instead, it has cast its decisions as the product of external forces: the bond markets (winter fuel cuts), international courts (arms to Israel and the Chagos Islands) and even television presenters (assisted dying). Small wonder, critics say, that voters aren’t sure what Labour stands for. Far from being an active government it resembles a passive one.
Some of the party’s younger MPs would have liked Reeves to make a principled case for winter fuel cuts: a necessary rebalancing of the welfare state. Public sector pay rises were initially presented as the unavoidable result of the independent pay review bodies (until the Chancellor declared in her conference speech that she was prepared to have a “fight about this”).
Reeves appears to have won the confidence of the markets and – for now – her cabinet colleagues. But a defining test of her Budget will be whether she is prepared not just to announce tough decisions – but to justify them.
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