After warning of tightened purse strings, the public may well be perplexed by Reeves | Politics News
Remember the £22bn black hole?
Within weeks of coming into government Labour was warning about its dire inheritance.
The chancellor told us that a difficult road lay ahead, priming the public for tax rises and public spending cuts. We were told the country couldn’t afford to lift the two-child benefit cap and that pensioners’ fuel payments would have to be cut.
Senior Labour politicians sounded the alarm.
“We would have seen the markets losing confidence, potentially a run on the pound, the economy crashing,” they warned.
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So, the public might be a little confused on budget day when the chancellor announces billions of pounds of investment spending- as she is strongly hinting she will do.
She’s just announced £22bn in funding over 25 years for the carbon capture Industry. If there was no money, where has this money come from?
The Treasury treats day-to-day spending and investment spending as distinctly separate. The message from the chancellor is that the Tories underinvested in this country and Ms Reeves’ plan is to reverse it. She could flex her fiscal rules to allow for more borrowing to fund it.
Most economists would say this type of spending is a good thing, that capital investment drives economic growth in the economy. Higher growth drives up tax revenues and means our debt is more sustainable.
As for the markets – the promise of growth makes borrowing for investment more palatable. These aren’t unfunded and potentially inflationary tax cuts.
It is why we will simultaneously be told that “times are hard” and yet promised billions of pounds in spending on investment projects.
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Taxes may have to go up and spending could be cut – we may even hear the word “austerity” on budget day – but it will be harder for the government to say all of this is necessary when it is spending in other areas.
It will require the Treasury to sell an economic message that is more complex than the simplified version they were selling just a few months ago.
Politicians used the language of necessity to mask their political choices. Now they will have to explain those choices and tease out the complexities of their strategy for growth and the public finances.