Breach in Labour armour: Reeves’ October budget did nothing to fix the foundations, says ALEX BRUMMER

One can understand why the Chancellor was content to let her underwhelming Chief Secretary to the Treasury Darren Jones take the heat for the crash in confidence in gilt-edged stock and the pound in the Commons.

If Rachel Reeves has chosen to appear, before hot-footing it to Beijing, she might have feared giving in to the crisis narrative.

The reality is that her stewardship of the Treasury and Labour’s occupation of Downing Street has been strewn with fundamental errors. 

The wisdom of the Treasury has long been held in high esteem in Whitehall from where it rules the roost over other Government departments.

In recent times a great deal of experience, so critical in times of market upheaval, has walked out.

The decision of Liz Truss to dispense with Tom Scholar, who helped guide the Labour government through the 2008-09 financial crisis, was a fundamental mistake which left the Treasury exposed.

In the distant past Labour governments have been helped by experienced fixers.

The names of Harold Lever and Joel Barnett come to mind. During an LBC radio interview the former Cabinet Secretary Gus O’Donnell, known as ‘GOD’ at Westminster, argued that Number 10 needs ‘more intellectual heft and economic expertise’ to tackle the upcoming spending review otherwise it will be ‘incredibly messy.’

Reeves began her incumbency with a strong following wind. Much of it dissipated very quickly. 

Her insistence on referring endlessly to a £22billion black hole in the public finances, still part of Jones’s spiel in the Commons, was a bond market dampener almost from the first day.

The muddle only became worse. The early passage in July of Labour’s Budget Responsibility Bill, intended as riposte to Trussonomics is a mistake. 

Except in the case of an emergency (such as Covid-19), it requires the Office for Budget Responsibility (OBR) to provide a full assessment of every ‘fiscally significant’ event.

It represents a big divestment of power and flexibility to an independent agency.

If the idea was to ensure Government policies would be trusted by the markets, because of the OBR imprimatur, it has failed. 

The underlying cause of the current imbroglio is that Reeves’ budget on July 30 did nothing to fix the foundations.

As the Institute for Fiscal Studies notes, it left a ‘razor-thin’ margin for meeting her own fiscal rules. 

The surge in bond rates, now at a 16-and-a-half year high, has raised the cost of servicing national debt and wiped out the headroom.

It is now likely that the OBR will forecast higher borrowing in March fuelled by extra interest costs of some £8billion, against the £10billion headroom.

In addition, there could be a sharp reduction in the growth forecast, the economy having ground to halt in the second half of last year.

The only thing propping it up is the splurge of spending on public services where money is being splashed without productivity goals. 

It is too early to predict what will happen on March 26, when there is meant to be a vanilla OBR update.

Public spending decisions were to be postponed until June to give more time to a ‘zero’ budgeting approach, where every department has to go back to basics and justify all spending.

Even if the markets were to correct cuts in public spending, a new austerity may be unavoidable unless Reeves finds a way of retreating from her pledge before the CBI business leaders of no more tax rises after the £40billion already removed from the pockets of business and consumers.

The big Labour drivers of growth, housing and infrastructure, a green energy revolution and business confidence will all be damaged by higher interest rates which dramatically change the economics of investment.

The Bank of England, having suffered the slings and arrows of keeping rates too low for too long and Russia’s war on Ukraine, may be reluctant to help.

If it were to lower short-term rates, it could assist in guiding down longer borrowing costs.

Governor Andrew Bailey, accompanying the Chancellor to China, could have been a reassuring presence on Threadneedle Street at this time. He is well-schooled in crisis management.

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