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Reeves’s address to the House of Commons was to reinforce the claim that the Tories lost control of the economy in the months leading up to the election which contributed in large part to a Labour landslide. This type of speech is a common tactic at the start of a parliamentary term, previously shown in George Osborne in 2010 blaming Labour for the mess that the Conservatives had inherited .
To see the live speech Reeves made in the Commons last week, see the video below
Reeves declared that there was an approximately £22 billion fiscal black hole, which is before large compensations such as the contaminated blood and the Post Office scandals were accounted for, which will further increase this figure . Reeves stated that Labour had inherited a projected overspend larger than what the previous government had planned for which she claimed the Tories had concealed . The Conservatives replied that the black hole is at least partly due to Labour’s discretionary choices, such as pay settlements that Labour have accepted in full . The Institute for Fiscal Studies stated some of Labour’s claims of hidden spending by the Tories “appear” correct, including £6.4bn on the asylum system, including the Rwanda deportation scheme, but adding that “half of [the] spending ‘hole’ is public pay over which the government made a choice and where the pressures were known” . This includes a new pay deal for junior doctors which could lead to a 22.3% pay rise over two years . To combat the black hole, Reeves announced spending cuts on infrastructure projects, transport and social care of £5.5bn . With the UK’s national debt approximately the same size as its GDP, the UK faces large debt interest payments, which have an opportunity cost on other areas of the economy.
Winter fuel payments, previously given to all pensioners, will now only be received by people on lower incomes who receive pension credit or other means-tested benefits. The previous government’s New Hospital Programme and 40 hospitals by 2030 commitment are also under review. Additionally, the Advanced British Standard has also been scrapped. The Rwanda scheme is cancelled and asylum claims will be processed again, which Reeves says will save £800m this year and £1.4bn next year. The chancellor said many of these projects were unfunded and had poor delivery. The A303 Stonehenge project, of an estimated cost of £1.9 billion, which involved the A-road which runs alongside the landmark to be converted into a tunnel beneath it, with more lanes, is also scrapped. National highways said the project would dramatically reduce travel times along the stretch of road from approximately one hour to only eight minutes, but campaigners argue the project will damage Stonehenge’s surrounding landscape which also had archaeological value and the project has been subject to legal battles . A lot of these projects are supply-side projects, i.e. projects that would increase the long-run economics potential of the UK economy. Whilst they take a long time to show their impact on the economy, in the long-term they can increase real GDP in an economy. Thus, cuts to these can cause lower levels of economic growth in the UK economy in the future, and with the UK economy already suffering from low productivity, the worsening of infrastructure and human capital will cause even greater harm to the UK economy.
Labour have also started actioning their manifesto commitments including announcing details of how it will add VAT to private school fees at the standard rate of 20% to fund 6,500 new teachers in England, and a windfall tax on oil and gas companies .
The spending cuts are only worth £5.5bn, thus the rest will have to come from tax rises and spending cuts announced in the budget on 30 October . Reeves reiterated that she would not raise VAT, national insurance or income tax, in accordance with Labour’s manifesto, but did not rule out increasing inheritance tax, capital gains tax, or reforming tax relief on pensions . While Reeves appears to be similar to Tory predecessors, the pay rises to public sector workers indicate that the country is not necessarily heading to austerity. Having accused the Conservatives of fiscal irresponsibility, Labour wants to be viewed as fiscally responsible. But it can be argued, as previously discussed, that infrastructure and welfare are required for stronger future economic growth.
Governments taking fiscal decisions is a trade-off as a lot of macroeconomic objectives conflict. In this case, the government is prioritising economic growth (through the public sector pay rises including very large junior doctor pay rise to prevent further industrial action, thus producing more goods and services in the economy), however, that inherently conflicts with keeping a balanced budget, hence causing the fiscal black hole to increase in size. While the government have tried to reverse the damage through spending cuts, this damages future economic growth (due to reducing spending on supply-side policies). This shows that governments are always making trade-offs and that some downsides will always be present regardless of the policies implemented.
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