ALEX BRUMMER: Rachel Reeves must live up to her message of HOPE

Former Labour Chancellor of the Exchequer Liam Byrne has deeply regretted the letter he sent to his Conservative Party successors in 2010 in which he stated: ‘I’m afraid there is no more money.’

His letter, a tradition among outgoing ministers, gave the impression that Labour had squandered its stewardship of the economy rather than save the world after the Great Financial Crisis.

Current Chancellor of the Exchequer Rachel Reeves and her boss Keir Starmer appear to have learned nothing from this event.

This week, after figures were released showing government debt was at its highest level of GDP since the early 1960s, a finance minister said the new government had “inherited the worst economic conditions since World War II”.

Although the national debt is higher than when the Conservatives came to power in 2010, the budget deficit is lower, as are unemployment and inflation.

Making her debut in the vast Churchill Room of the Revenue & Customs building, Reeves also declared that her government had inherited “the worst conditions since the Second World War.”

To top it all off, she added: “We are facing the legacy of 14 years of chaos and economic irresponsibility.”

The negativity, troweled over, was part of a choreographed Labour strategy to portray the Tories as parties that have left behind a terrible legacy that will take years to erase.

Rather than spreading a message about a better future under Labour, the Starmer team has taken the approach of David Cameron and George Osborne: blaming everything on their predecessors.

At the heart of Reeves’ speech, in which she unveiled plans to drive a carriage and horses through the planning laws to build 1.5 million homes, was a pledge to carry out a full Treasury audit of the government’s finances. There was, of course, a paradox at the heart of this.

She promised to strengthen the role of the Office for Budgetary Responsibility so that every financial event must be legally audited (legislation included in last week’s Speech from the Throne), while ordering her own freelance review.

There should be no misunderstanding about what this is all about. Reeves will not discover that Jeremy Hunt and his Tory predecessors were brilliant managers of the public finances.

She wants to demonstrate that there is a large black hole somewhere and that this can ultimately only be closed by raising taxes.

This is despite the fact that taxes, at 38 percent of national output, are the highest percentage since World War II.

Labour’s manifesto ruled out raising VAT (except for private schools), income tax or national insurance contributions. If new levies are introduced, they are likely to target wealth.

What is not entirely clear is why the Reeves exercise is necessary. The OBR is already preparing a full review of the government’s finances for an early autumn budget. The review, ordered by Reeves before the summer recess, must therefore be seen as a palliative for the pain that is yet to come.

In addition, the OBR provides regular monthly updates with figures on government loans and debts, so that the Minister of Finance always has up-to-date data.

The independent Institute for Fiscal Studies has already spoken of a ‘conspiracy of silence’ surrounding the financing of public services, given the promises made.

An assessment of spending needs for health and social care in the main parties’ manifestos found just £1bn of funding. But if Labour’s NHS workforce plan, for example, were to be implemented, the cost could be 20 times that.

By presenting a legacy as bleakly as possible, the new government is given more space and time.

A confidant of the prime minister is quoted in the Observer last weekend as saying: ‘It is crucial to give us time. If we don’t explain the scale of the problems, people will get frustrated with us.’

Major home builders have already warned that delivery times will be reduced due to high mortgage interest rates.

Barratt says it needs to catch up by buying more land and opening sites: neither is fast. There is some flexibility in the way a Treasury audit is conducted.

A gloomy forecast for economic growth, such as that of the Bank of England, is more likely to result in a much larger budget deficit than a more positive forecast.

The International Monetary Fund’s latest forecast, due on Wednesday, is expected to show growth of 0.7 percent in the first three months of 2024, with a similar figure achievable in the second quarter. That has already changed the dial.

Higher output means more tax revenues from VAT as people spend more. An analyst at the Office for National Statistics claimed the economy was running ‘gangbusters’ in the first quarter. That should mean more corporation and income tax revenues.

The danger is that Labour – by portraying the economy as a fiscal wreck – creates a self-fulfilling prophecy. At the moment, markets are on the side of the pound and stock markets are bubbling at the prospect of stability.

A terrible review could damage this rise in confidence. The Chancellor should be careful what she wishes for.

August can be a tricky month in the markets. While the big beasts among the traders retreat to their yachts, the underdogs have been known to seize the opportunity to increase their bonus pots. Feeding dealers with ammunition to sell off British assets can be risky.

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