Labour will be left with a “dire economic inheritance” if it wins the next election, Rachel Reeves said as she accused Jeremy Hunt of “maxing out” his fiscal rules to pay for tax cuts.
The shadow chancellor said the Conservatives had promised to “fix the roof, but what they’ve done is smashed the windows, broken the doors down and are now burning the whole house down. That is the reality for whoever will be prime minister or chancellor after the next election.”
At the budget next week, Hunt is expected to use his limited fiscal headroom to pay for tax cuts for workers. Reeves said the chancellor was manipulating his budget rules, which require the government to bring the debt ratio down within four to five years. This measure has been used to add billions to the Treasury’s calculation of the government’s room for manoeuvre.
“No other chancellor including George Osborne, Philip Hammond or Gordon Brown looked at what was available in year five [of the forecast] and said ‘we will have all that’,” Reeves said.
Labour would abide by the same debt rule, she said, and would not present any spending plans “that are incompatible with the fiscal rules. Our fiscal rules are non negotiable.”
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Reeves said Labour would aim to reduce the tax burden on working people, but would make no promises at this stage. “We would need to be able to say where the money is coming from,” she said.
The tax burden is due to rise to its highest level in the postwar era, to 37.7 per cent of GDP, by 2028, according to the Institute for Fiscal Studies.
Labour has ditched a policy of spending £28 billion a year to finance the green economy and said that any future spending plans were dependent on the state of the public finances. The party has committed to only a handful of new taxes on private schools, private equity groups and to expand an existing windfall tax on oil and gas producers in the North Sea. Reeves said the measures would raise about £5 billion that would provide “an immediate injection into our public services”.
“It will be a dire inheritance,” she said. “We are not going to be able to turn it around overnight. We have to grow the economy to have the money to invest in the public services, that is our relentless, ruthless focus.
“Businesses say they will invest, they want to, but uncertainty, the lack of stability and barriers and blockages discourage them from doing so. Our focus is to remove those barriers. I am confident we can turn around the growth rate.”
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Both parties’ commitment to fiscal rules has been criticised by a leading think tank, which said the “flawed set of rules is incentivising bad policy decisions shaped by short-termism and fictional spending plans”.
The Institute for Government called for a revamp to the rules whereby the Office for Budget Responsibility would provide a recommendation for how much headroom a chancellor should maintain, rather than the present system of calculating and recalculating the figure in the run-up to a budget.
In its report, the think tank also called for one budget a year, rather than two, a change that Labour has promised to make. Labour would have “a spring statement and the substantive budget would be in the autumn”, Reeves said. “Right now [we have two] fiscal events that don’t offer the certainty that businesses want.”
