Finance Minister Rachel Reeves was smiling on stage at the Labour Party’s annual conference in Liverpool on Monday. The chancellor had even been accused by some party members of being too negative about the progress of the British economy and had tried to send a message of optimism for the future. The chancellor promised to increase public spending and not raise taxes on “the working class”.
Reeves has reiterated his assurances that the government will not raise taxes on workers and, as Keir Starmer said during the campaign, will only impose a tax on energy companies and will continue the Conservative government’s plan to collect more tax from UK residents with overseas assets and focus on tackling tax evasion and avoidance. The details will be in the budget to be presented in October, but the government has assured that it will not increase VAT, withholding taxes on workers or corporation tax.
The Labour government believes it can pay off if the economy grows faster and will focus on promoting new housing and a new industrial policy. The minister talked of more “diggers” and “cranes” on the streets, new green investment and a growing video games industry.
The British economy is returning to growth after falling into recession at the end of last year. In the second quarter of the year, while the Conservative government was still in power, GDP grew by 0.6%, which is faster than the eurozone, although slightly less than that of neighbouring Spain or Ireland.
But Britain has suffered a decade of stagnation, cuts to public services and slowdowns in business activity due to the effects of Brexit. The latest data show that consumer confidence in the economy has deteriorated and the government has been criticised by the opposition and some economists for pushing the negative message. The Bank of England decided last week to keep rates at 5% instead of cutting them like the Federal Reserve and the European Central Bank over fears of soaring prices.
Trying to put on a brave face in difficult times, Reeves assured that he was optimistic about the country’s future, but also that we had to first “make good decisions.” “Stability is a crucial foundation on which to build our ambitions,” Reeves said. “Any growth project without stability only leads to ruin.”
Conservative hole
Reeves claims to have discovered upon his arrival a budgetary hole of 22 billion pounds (more than 26 billion euros), a legacy of the Conservative government on which he did not count and which he will now have to remedy.
“I can continue to cover it up and pretend it’s not happening or I can be open and honest with people about the scale of the challenge and the fact that the road ahead is going to be harder and steeper than they expected,” the minister said in an interview with the BBC ahead of his speech.
The “hole” left by Rishi Sunak’s government is due in part to the fact that there has been no consideration of how to finance the additional wage compensation planned for civil servants, aid to private railway companies and the accommodation costs of around 100,000 asylum seekers. In addition, inflation over the last two years has been higher than expected.
The government has already approved in Parliament the removal of the electricity bill subsidy for the majority of pensioners in England and Wales. Only those on the lowest incomes will continue to receive the subsidy of between £120 and £350, meaning that 1.5 million people will receive it instead of more than 11 million. The government says this will be offset by a 4% increase in pensions next year.
“I know that not everyone in this room or in this country will agree with every decision I make,” Reeves said in his speech to colleagues and union members, many of whom were unhappy with the move. “I felt it was the right decision under the circumstances that we inherited.”
Reeves said in the BBC interview that he would have to take “a number of tough measures on tax, spending and subsidies”, but in his speech to the Labour conference he focused on the more optimistic message.
“We will not return to austerity,” the chancellor said, referring to the Conservative Party’s motto after it came to power in 2010 and which it subsequently used in a positive tone. “Tory austerity has been a destructive choice for our public services, but also for investment and growth.”
Reeves said public spending would increase “in real terms” over the next five years, but he would not rule out cuts in some departments. “Spending has to be negotiated department by department,” he told the BBC.
The minister will outline the spending and tax plans when he delivers the new Labour government’s first budget on October 30.
Reeves also announced an investigation to recover money from irregular contracts during the pandemic that favoured businessmen close to the Conservative Party, as already revealed by journalistic investigations and organisations dedicated to the transparency of public accounts. About half of the emergency contracts will be examined by a new commissioner charged with investigating possible corruption that the new government says cost taxpayers “billions” and ended up “with friends and donors of the Conservative Party”.
The effect of Brexit
The impact of Brexit is reducing the UK’s trade with its biggest trading partner and has been worsening since the new rules came into force. While buying and selling goods with the EU has declined, British businesses have barely managed to do more business with other countries and the UK has not signed the trade deal it had hoped for with the US. Between 2021 and 2023, the UK bought 32% less from the EU and sold 27% less to the bloc, which still accounts for almost half of its trade.
The new Labour government is betting everything on accelerating growth with some adjustments to the agreement with the EU, but without returning to the single market, where there are other countries that do not belong to the community club, such as Switzerland or Norway. The type of withdrawal agreement negotiated by Boris Johnson does not allow this option and the Labour government is reluctant to reopen the conversation to avoid the mobilization of the most radical Brexit minority.
The majority of people say that if there were a new referendum they would vote to rejoin the EU and believe that the disadvantages of Brexit outweigh the advantages, according to the latest YouGov polls from August.
