‘I’m afraid there is no money’. This was the supposedly amusing message left behind for the incoming Chief Secretary to the Treasury by Labour‘s departing man in the post, Liam Byrne, in 2010.
Unfortunately for Mr Byrne, his successor (a Lib Dem member of David Cameron‘s coalition government) ruthlessly made public this private missive: and for the intervening years it was continually quoted by the Conservatives, to demonstrate Labour’s insouciance about budgetary matters, and the mess it had left behind.
Now, the new Chancellor, Rachel Reeves, is attempting to do the same back: to gain a measure of revenge and, perhaps, to prepare the grounds for tax rises ‘on working people’ that, throughout the election campaign, she and her colleagues pledged they absolutely would not inflict.
Thus, today, she will produce ‘a Treasury audit of public finances’; but Labour has already been busy leaking (and promoting) its conclusion.
Apparently, there is a hitherto unknown ‘£20 billion black hole’, a complete shock to the incoming government: Labour’s spin doctors have told reporters that Reeves will declare Britain to be ‘broke and broken’.
Chancellor Rachel Reeves is attempting to prepare the grounds for tax rises ‘on working people’ that she and her colleagues pledged they would not inflict
This last bit is an echo of Labour’s claim, throughout the election campaign, that they would be confronted with ‘the worst economic inheritance of any incoming government since World War II’. Worse than what faced Margaret Thatcher in 1979? Or, indeed, Labour’s Harold Wilson in 1974?
They both faced headwinds, not least in terms of galloping inflation, dwarfing anything confronting Sir Keir Starmer‘s administration. Now, our inflation rate is at the Bank of England‘s target (2 per cent), actually lower than in the Eurozone. And the British economy has, over the first quarter of the year, been growing at the fastest rate in the G7.
As Ethan Ilzetzki of the London School of Economics said, when asked by BBC Verify about Labour’s claim to have the worst economic inheritance for 80 years: ‘I struggle to find a metric that would make that statement correct.’ That is economist-speak for ‘it’s complete garbage’.
Ex-Chief Secretary to the Treasury Liam Byrne famously left a note for his successor to say there was ‘no money’ left when his party lost power in 2010
And, for different reasons, so is Labour’s replacement claim — that it is facing a completely unexpected £20 billion ‘black hole’ in the public finances. Not that they are in great shape, far from it: total public debt, as a proportion of GDP, is the highest since the 1960s, and with a much less favourable demographic, in terms of the age profile of the population.
But, as Reeves herself told the Financial Times during the election campaign: ‘We’ve got the Office for Budget Responsibility (OBR) now’ — a reference to the fiscal watchdog’s detailed and entirely open scrutiny of the public finances — ‘We know things are in a pretty bad state. You don’t need to win an election to find out.’
But now, she says you do. A claim which, last week, the director of the Institute for Fiscal Studies, Paul Johnson, (asked about Reeves’ claim to have discovered a ‘£20 billion black hole’) described as ‘not very credible at all’.
The Conservatives fought a running battle over public sector pay during the past two years
There is just one big thing Labour has discovered that had not been known before the election. The public-sector pay review bodies are recommending increases of 5.5 per cent for millions of workers, across health, defence, the justice system and the teaching profession.
The Treasury’s budgeting figures had allowed for little more than an inflation-linked increase in public sector pay (3 per cent).
That difference accounts for a very large chunk of the alleged £20 billion ‘black hole’. But here’s the thing: Rachel Reeves has a choice about whether to meet that 5.5 per cent recommendation.Â
The Conservatives fought a running battle over public sector pay during the past two years: I doubt Labour has an appetite for the strikes that approach provoked, and a confrontation with the unions which fund their party so generously. They will pay up.
By the way, while £20 billion sounds enormous, it is tiny as a proportion of the entire public-sector budget. In the last financial year, government spending across the UK was almost £1,200 billion (Or £1.2 trillion).
In that context, £20 billion is almost margin of error stuff — and certainly nothing that would justify any breach this year by Reeves of her explicit promise during the election that there would be ‘no additional tax rises’ beyond those set out in the manifesto (such as to non-doms and on private schools).
Last week, the Chancellor declared that the reason for the very high levels of public debt — now being paid for by taxes having to rise to the highest level, as a proportion of GDP, for 70 years — was that ‘the previous government spent money like there was no tomorrow’.
Yes, there was a lot of that. But what were the principal elements? They were, in turn, the furlough scheme during the Covid pandemic, and then the ‘cost of living‘ support — massive subsidies of home energy bills when oil and gas prices spiralled up in 2022.
Yet, not only did Labour support those colossal expenditures, its only criticism had been that they did not go far enough.
In September 2020, Rachel Reeves said she wanted ‘more economic support for businesses and workers’ than the government was already offering, in terms of an extension of the furlough scheme.Â
And in August 2022, she urged the government to act immediately to ‘freeze energy bills now so households don’t pay a penny more in winter’.
Actually, Liz Truss took that advice, as soon as she became prime minister.
And it was the combination of Truss’s extraordinary decision to combine a two-year energy price cap with a range of tax cuts, and a promise ‘absolutely’ not to cut public expenditure that sent both sterling and the market for UK debt into a tailspin requiring emergency mitigating measures from the Bank of England.
It was this episode that truly trashed the Conservatives’ reputation for sound economic management.
But it is a seldom-reported fact that the only element of the Truss/Kwarteng mini-Budget fiasco that Sir Keir Starmer and Reeves volubly opposed at the time was the removal of the 45p-in-the-pound top rate of tax, which was far and away the tiniest element in the ill-fated package.
This absolves the Conservatives not at all, obviously; but let’s not pretend that Starmer and Reeves were clairvoyants.
Similarly, the fact that David Cameron and George Osborne supported all the rocketing public expenditure under Gordon Brown does not absolve Labour of full responsibility for how that ended after the Scottish banks celebrated by Brown had to be bailed out by the taxpayer — leading to that ‘no money left’ missive by Liam Byrne.
But there is an important distinction between then and now. As the former chancellor Jeremy Hunt put it to me yesterday: ‘The difference is that Labour ducked the difficult choices on tax and spend, with [chancellor] Alistair Darling forbidden by Gordon Brown from even talking about spending cuts. But we addressed them head on, which is why the budget deficit is 4.5 per cent, not the 11.8 per cent which we inherited in 2010.’
Now, the public generally does not want to hear from the Conservatives. But I suspect most can still see when Labour is playing political games with the public finances.
