Starmer and Reeves promised honesty about public finances. Can they stay the course?

The Guardian

2 days ago

During the first televised debate in the run-up to last summer's general election, Keir Starmer used a phrase that received enthusiastic – and unanticipated – applause from the Salford audience.
'I don't pretend there's a magic wand that will fix everything overnight,' he told them. Labour strategists were surprised by the clapping, and encouraged him to deploy the line again in future.
The prime minister, his aides said, entered office determined not to fall into the same trap as many leaders before him of making promises that were never going to be kept because of the state of the public finances.
For her part, Rachel Reeves arrived at the Treasury intent on hammering home the message the Tories were to blame for the sorry state of the nation's books.
Her downbeat statement to MPs last July, in which she slashed the winter fuel allowance, zeroed in on the immediate 'black hole' left by Jeremy Hunt. 'This level of overspend is not sustainable. Left unchecked, it is a risk to economic stability,' she warned.
A month later, Starmer's gloom-laden speech in the Downing Street garden underlined the government's economic pessimism. 'I have to be honest with you: things are worse than we ever imagined,' he said.
Somewhere along the way, the determination to be brutally honest with the public, come what may, has been knocked off course. Some inside government are worried that Starmer – in the face of slumping poll ratings – may have lost his nerve.
Ministers argued that winter fuel payments were not sustainable, but then reversed cuts after poor local election results. They emphasised the fiscal advantages of disability benefit changes, and consequently lost the support of their own MPs.
But as the Office for Budget Responsibility (OBR) made starkly clear this week, there are also intense pressures on the public finances over the longer term, including the inexorable rise in the cost of state pensions.
Richard Hughes, the OBR chair, stressed this was due to the design of the triple lock policy, as well as the UK's ageing society. 'The UK public finances are in an unsustainable position in the long run. The UK cannot afford the array of promises that it has made to the public,' he warned.
In her Mansion House speech next week, the chancellor will address the OBR report and again point the finger of blame at the Tories, with national debt at a historic high – the UK spends more than £100bn a year on debt interest – and interest rates still recovering from Liz Truss's mini-budget.
She will argue that there is 'nothing progressive' about having higher debt, Treasury sources said. With more borrowing off the table, and the government opposed to further austerity, that leaves tax. The chancellor is widely expected to put up taxes in her autumn budget, potentially by freezing income tax thresholds once again.
'All governments … come to each budget as an individual set of choices, almost forgetting what happened last year and without setting a direction for the future,' Paul Johnson, the outgoing director of the Institute for Fiscal Studies, told the BBC's Week in Westminster programme. 'I slightly worry that we're in the same sort of place with this government. It feels like we're going to get another set of tactical decisions to respond to whatever this year's fiscal situation is.'
Ruth Curtice, chief executive of the Resolution Foundation thinktank, said that despite the ferocity of the rows over tax and spending over the past 12 months, politicians had not confronted a fundamental question.
'We're not really having a big debate about the fact that the state's got a lot bigger than it was before the pandemic. Does the country want to pay for that with higher taxes, or make it smaller again?'
She said the trade-offs faced by Reeves and her predecessors had been exacerbated by the continued weakness of the UK economy after a series of shocks – the global financial crash, the pandemic and the energy crisis sparked by Russia's invasion of Ukraine.
'Fundamentally, it comes from this lack of growth in the economy. Growth has been disappointing since 2010, and we haven't really faced up to whether that just means that we're poorer as a country.'
The latest growth figures, showing that Britain's economy unexpectedly shrank in May, underline the point. It is felt most in people's pockets: wages have stagnated for much of the last decade.
'There's a reason the electorate is concerned about this, which is that they've had 15 years without a pay rise effectively. This is the consequence,' Johnson said.
'It's a zero-sum game when you don't have growth. More money for one group of people means less money for another. The rhetoric of this government is right: growth, growth, growth. Without growth, we are stuck in that doom loop.'
Rob Ford, a professor of political science at the University of Manchester, said: 'Whenever you look at the polling on this, the immediate reaction is to become profoundly depressed and somewhat more sympathetic towards the plight of politicians.
'Because what people will tell pollsters, over and over again, is that they want more money spent on the things they like and they don't want their taxes to go up, and that someone they don't like should pay for it.'
Labour is still hoping for a bounce in growth that would ease the pressures on the public finances – but a year in, and with a crunch budget looming in the autumn, it has not materialised yet.
Neither have they taken either of the two potential pivot points – Donald Trump's trade tariffs or increased defence spending – that would have allowed them to take a tougher message to the public on the economic realities.
Government sources, however, defend the decision to stick to Reeves's self-imposed fiscal rules. 'They're purposely designed to get the public finances on to a sustainable footing. They're not self-imposed, they're cold economic reality,' one said.
'We've been honest that the public finances need to improve. We've taken some significant steps. Has that been pain-free? No. We're having to get a grip on day-to-day spending, saying no. That's not shirking away from the challenge, that's grabbing it.'