The Reeves prescription: Labour's first Budget

A short response to Wednesday's financial statement: background, context and some broad policy observations

Introduction

Budget Day in the House of Commons is still an exciting occasion, although, as I have written, the staggering extent to which the contents of the Budget were briefed, revealed and leaked robbed this week’s drama of some of its sharpness. When I still worked at Westminster, it retained a faint glow of carnival and glamour: in days gone by, some MPs would wear morning dress to mark the occasion, while the Labour MP for North East Derbyshire from 1959 to 1979, Tom Swain, once retaliated by sporting a miner’s helmet. Until 1997, the Chancellor of the Exchequer was uniquely given dispensation to drink something other than water at the despatch box—Kenneth Clarke chose whisky—but Gordon Brown declined to use the leeway and the tradition has fallen into desuetude.

It is also a significant event for the Chairman of Ways and Means and Deputy Speaker of the House of Commons, who by tradition presides over the Budget proceedings in place of the Speaker. Consequently when I was Private Secretary to Sir Lindsay Hoyle in that role, I spent the whole of the Chancellor’s financial statement in 2011 standing by the Speaker’s Chair in the chamber. This week was the first time the new Chairman of Ways and Means, Nusrat Ghani, has presided over a Budget debate, and she handled the event with aplomb, supervising a noisy and restive House.

Rachel Reeves is, of course, the first woman ever to deliver a Budget speech. There are various opinions on when the post of Chancellor of the Exchequer appeared: the Exchequer itself, an institution responsible for collecting and managing taxes and revenues, is first mentioned in a writ of 1110, and there is an extant Exchequer Pipe Roll from 1130. Eustace of Fauconberg is cited by some as the first Chancellor, in 1221 or so, while others prefer Hervey de Stanton in 1316. Either way, it is an enormously ancient office, and the last of the so-called “great offices of state” to be held by a woman (after Margaret Thatcher became Prime Minister in 1979, Margaret Beckett became Foreign Secretary in 2006 and Jacqui Smith was appointed Home Secretary in 2007).

(Since at least the turn of the century, this has, I think, largely been a matter of chance. Margaret Thatcher famously did not think a woman would become prime minister in her lifetime and initially the chancellorship was the summit of her ambition. It is also often noted that in the 11 years of her tenure in Downing Street, Thatcher only ever promoted one woman, Baroness Young, to the cabinet, and John Major’s first cabinet in 1990 was all-male. By 2000 or so, very few people would seriously have suggested that a woman was not capable of any cabinet job, but there were not many plausible female candidates for the Treasury: perhaps for a while Patricia Hewitt or Ruth Kelly, Yvette Cooper, Liz Truss, Andrea Leadsom. Only three women have ever been Chief Secretary to the Treasury, the Chancellor’s deputy who is usually also of cabinet rank, since the post was created in 1961: Yvette Cooper (2008-09), Liz Truss (2017-19) and Laura Trott (2023-24).)

The Budget

What we think of as “the Budget” is actually the Financial Statement and Budget Report by the Chancellor of the Exchequer to the House of Commons (see Wednesday’s Order Paper). After the Chancellor has made his or her statement, the first of the Budget resolutions is moved—in this case, “Income Tax (Change)”—by the Chancellor and it is technically on that motion that the Budget debate occurs. There are five full days dedicated to debating the measures in the Budget.

Rachel Reeves spoke for 76 minutes in delivering her first Budget. The BBC described it as a “marathon” but that displays a lack of historical awareness; the shortest ever Budget speech was Benjamin Disraeli’s Financial Statement in 1867, which lasted a full 45 minutes, while the longest, inevitably given by William Gladstone, was in 1853 and ran for four hours and 45 minutes. It is hardly surprising, as Reeves was presenting the Labour Party’s first Budget since Alistair Darling in March 2010. The Chancellor waited a long time after the appointment of the new government beginning on 5 July to assemble a Budget; George Osborne delivered a Budget on behalf of the Conservative/Liberal Democrat coalition within seven weeks, while Gordon Brown presented New Labour’s first Budget after eight and a half weeks. Reeves, of course, had to negotiate Parliament’s summer adjournment in July.

Many commentators with deeper economic expertise than me have painstakingly dissected the provisions of the Budget and I have no intention of trying palely to imitate them. However, I do want to touch on a handful of specific measures in areas which particularly interest me, as well as make one or two broader philosophical points about the government’s economic strategy.

I mentioned the extensive disclosure of details of the Budget in advance of the Chancellor’s statement. On Monday, the Speaker admonished the government for these briefings and leaks in strong terms; he described them as “a supreme discourtesy to the House” and expressed himself “very disappointed that the Chancellor expects the House to wait nearly a full week to hear her repeat the announcements in the Budget statement”. Immediately before Reeves gave her Financial Statement on Wednesday, the Chairman of Ways and Means reprimanded the government again in similar terms, and dismissed in particular the defence briefed by Downing Street that previous governments had leaked Budget details:

I am disappointed by comments made by Government spokespeople believing they can use precedent as an excuse. I am telling them today that they are entirely wrong.

One minor matter of the historical record bothered me. Reeves explicitly presented herself as part of a succession of epoch-defining Labour chancellors remaking the state, referring to 1945 and 1997. But she also argued that “in 1964, it was the Labour party that rebuilt Britain with the white heat of technology”. This is debatable at best. The “white heat of technology” is a famous misquotation from Harold Wilson’s speech to the Labour Party conference at Scarborough in October 1963. What the then-Leader of the Opposition actually said was this:

The Britain that is going to be forged in the white heat of this revolution will be no place for restrictive practices or for outdated methods on either side of industry.

I take issue on two grounds. The first is that there is a very flimsy case for arguing that Britain in 1964 needed to be “rebuilt” in anything like the way it did in 1945, or that the changes effected by the Labour government of 1964-70 were as major and far-reaching as those of Tony Blair’s administrations after 1997. There is a vague but misguided feeling among many that Labour’s victory in 1964 was inevitable and revolutionary, but it was certainly not the former and only arguably in any way the latter. Having been defeated in 1951, 1955 and 1959, the Labour Party only squeaked into office with a majority of four seats, its margin over the Conservatives only 0.7 per cent of the popular vote, or 200,000 votes nationally. As I have previously written, despite the mockery of his supposedly outdated and aristocratic image, the Prime Minister, Sir Alec Douglas-Home, was an effective campaigner and ran the celebrated media maestro Harold Wilson extremely close.

The country in 1964 was hardly on the brink of collapse. The economy was growing at a now-unimaginable four per cent a year and exports were buoyant. Inflation was only two per cent (although wage increases were running at between three and three-and-a-half per cent), and unemployment had been kept to around two per cent for 10 years. The ill effects of a recession in the United States in 1960-61 had generally abated and industrial relations were harmonious.

Conversely, the Labour government failed to achieve to kind of economic and industrial transformation it promised and hoped for. Wilson attempted to introduce more systematic planning into the economy by separating parts of HM Treasury into a new Department of Economic Affairs under George Brown and tasking it with producing a National Plan, which was published in September 1965. But projected growth of 3.8 per cent per year was not realised, running instead at around 2.2 per cent, the department was abolished within five years under three secretaries of state and its role re-absorbed into the Treasury. Meanwhile there was an economic and political crisis in November 1967 when the government was forced to devalue sterling from $2.80 to $2.40; increasing tension with the trades unions took an economic toll, and plans to change the relationship between unions, employers and government, contained in 1968’s White Paper In Place of Strife, had to be abandoned because of union-backed opposition; and the so-called “white heat of technology”, represented by the establishment of the Ministry of Technology in 1964, had a very modest impact.

The Office of Value for Money

To return to Rachel Reeves’s Budget, one institutional measure announced was the creation of an Office of Value for Money. This body has two purposes: first, to make government more efficient and therefore deliver better value for money to taxpayers by identifying waste and inefficiency and scrutinising investment proposals; second, to “develop recommendations for system reform”, by drawing on international best practice and involving external expertise. The OVfM will be chaired by David Goldstone, an expert in financial accountability with extensive public sector experience. (Some eyebrows were raised wryly at his involvement with the Ministry of Defence, the Palace of Westminster Restoration and Renewal Programme and High Speed 2, none of them characterised by rigorous efficiency or value for money.)

The Office of Value for Money had been trailed for some months, the concept having first been mooted in February 2023, and Reeves confirmed the government’s plans for it to the House of Commons in July. At first glance there would seem to be potential overlap with the work of the National Audit Office, established under the National Audit Act 1983, which audits Whitehall departments, agencies and non-departmental public bodies and carries out value for money studies of the administration of public policy. The distinction between the two is the the OVfM is intended to identify efficiencies and savings before policy is executed, while the NAO is necessarily a retrospective organisation, albeit setting out lessons which can and should be learned in future.

There are two factors which should qualify the hopes resting on the OVfM. The first is that, however ineffectively or unevenly, government policy is already assessed for value for money as part of the normal process of development. The new organisation is not launching itself into some terra incognita, although it is possible it will make the process more rigorous and reliable. Secondly, however, on that point, the OVfM is intended to draw on existing civil service resources, so it is effectively a reshuffle of Whitehall staff rather than a bold expansion of the government’s assessment capacity. Based within HM Treasury and served by up to 20 civil servants, it is also a time-limited organisation, scheduled to last for a year with the possibility of extending its life beyond that date. Whether it benefits from having an independent external chair, but, as one consultant counselled in July, the OVfM must not be distracted purely by short-term savings and must have robust processes for learning and sharing best practice.

The defence of the realm

The Chancellor also announced that the Ministry of Defence will receive additional funding of £2.9 billion next year. I examined this measure in The Spectator and need not rehearse my arguments; suffice to say that, while extra resources are always welcome, the sum involved here is not large enough to have a substantial effect on the readiness, personnel or equipment of the armed forces. Reeves reiterated that the government will set a path to spending 2.5% of GDP on defence at a future fiscal event”, but, without a timetable, that promise of higher spending is literally meaningless. It stands in sharp contrast to the Chancellor’s admirable but fuzzy declaration of “providing guaranteed military support to Ukraine of £3 billion per year for as long as it takes”. Who will select the metric for “as long as it takes”? If, which God forbid, the Russian invasion of Ukraine settles into a frozen conflict, to what extent does the government feel it is committed?

High Speed 2

There was some further movement on the notoriously spendthrift High Speed 2 rail project. At last year’s Conservative Party conference, Rishi Sunak cancelled the planned extent of HS2 north of Birmingham, and thereby reduced the entire network to a link between Birmingham and Old Oak Common in west London. Connecting it to Euston had been ruled out on the grounds of costs, but Reeves has reversed this decision; or, at least, she may have done. What she announced was that the government was:

Committing the funding required to begin tunnelling work to London Euston station. That will catalyse private investment into the local area, delivering jobs and growth.

It is worth noting that this is not a commitment to fund the construction of HS2 between Old Oak Common and Euston, and is reliant on the private sector to provide at least some of the finance required.

High Speed 2 has been bedevilled by delays and gargantuan budgetary excesses for more than a decade and it would be wrong to place too much blame on the current government. Until the Budget, the UK was facing the prospect of spending more than £100 billion on a rail link between Birmingham and west London, to be completed some time in the early 2030s. It is not clear that situation has improved vastly. The overall costs will certainly not fall, nor will the schedule become shorter. There are different schools on thought on whether the extension of the railway to Euston is worth the expenditure, but the question which struck me was this: if the “private investment” the government expects to be “catalysed” does not materialise, what is Plan B? Will construction simply not proceed, or—surely more likely—will a reluctant government be forced to meet the costs? And what will these costs be? £3 billion? £5 billion? Like so many public procurement projects, HS2 has now reached such outlandish levels of expenditure that sums seem to lose their meaning.

The NHS

The Chancellor inevitably announced significant spending increases for the National Health Service. To some extent, this is both expected and necessary, but at this stage I would highlight one issue. Reeves repeated the argument the Prime Minister has made that NHS “reform must come alongside investment”, which has considerably logic, but let us be clear about the spending she announced: there is an extra £25.7 billion this year and next, a huge sum, but of that total £22.6 billion is day-to-day spending on the running of the NHS, while only £3.1 billion will be capital investment. No-one would deny that the additional resources will be valuable, but £3.1 billion over two years is not the kind of transformative investment in reform to which the government has alluded. More to come on this matter: as the Chancellor said, “the Health Secretary will be setting out further details of his review into the new hospital programme in the coming weeks and publishing in the new year”.

The bigger picture: a bigger state and a bigger tax bill

Rachel Reeves summed up her Budget as delivering “more”:

More teachers in our schools, more appointments in our NHS, more homes being built, fixing the foundations of our economy, investing in our future, delivering change and rebuilding Britain.

Certainly the scale of the tax increases and public spending is enormous. That is partly an ideological and philosophical issue. As the Labour Party had repeatedly observed while in opposition, the United Kingdom has a heavier tax burden now than at any time for 70 years, and under Reeves’s plans that will increase. We are moving towards a larger state taking more money from taxpayers, with the Office for Budget Responsibility estimating that by the end of the decade taxation will absorb an unprecedented 38 per cent of national income, while government spending will be a daunting 44 per cent of income. The chair of the OBR, Richard Hughes, described the Budget as “one of the largest increases in spending, tax and borrowing of any single fiscal event in history”.

The OBR’s assessment of the economic and fiscal outlook is not the rosy picture for which the government might have hoped. It does not anticipate a significant increase in the rate of economic growth, and, more damningly, it predicts that a larger state will not only fail to encourage an increase in private sector investment, but will in fact “crowd out” private finance and lead to a fall in living standards, albeit a marginal one, by the end of the decade. No matter how much the Chancellor insists that increasing the National Insurance contributions by employers does not represent higher taxes on “working people”, the OBR states that 75 per cent of the additional liability will come from lower wages while the rest will result in higher prices.

There will obviously be short-term benefits from the additional public spending, and many of these may be immediately apparent. Over the course of this parliament, however, what are we expecting to see? Unless the OBR’s predictions are badly inaccurate, we will approach the next general election with growth largely unchanged at around 1.2 per cent per year, less private investment, lower living standards, £140 billion more in borrowing than the previous government had planned and a state larger and more acquisitive than ever. Labour will claim that all of these are consequences of inevitable measures to repair the damage wrought by the Conservatives; whether one accepts the validity of this or not, its political potency will wear off. By 2028 or 2029, blaming the previous government will resonate rather less with the electorate, especially as Rishi Sunak, Liz Truss, Boris Johnson, Jeremy Hunt, Kwasi Kwarteng and other once-familiar faces fade from front-line prominence.

I come back to the argument I have made again and again since it looked likely that Labour would win the general election and form the next government: it is a bold interpretation to look at the last 10-15 years of British politics and conclude that one solution to the challenges the country faces is a bigger state imposing a higher burden of taxation. I have previously wondered whether the Labour Party really has the insight and determination to make radical changes to the NHS, and these are a microcosm of the broader landscape: we cannot keep increasing taxation and public spending in the hope that the existing institutions of government will be more effective. More radical re-evaluation of what the state does, and how it does it, is the only way to make sustainable progress.

The government is not yet four months old, and this is the Chancellor’s first Budget. But it has not been a magic wand. Even on its own terms, it is a sticking plaster rather than a long-term cure. Starmer, Reeves and their colleagues will need more than this.