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THE UK’s new Labour government will not return to the austerity cuts of its Conservative predecessors, Chancellor of the Exchequer Rachel Reeves said on Monday (Sep 23), as she pivots towards a more positive narrative after weeks of warning about the dire state of the public finances.
With Labour hosting what it’s billing as its biggest-ever business day at its annual party conference, Reeves is set to dangle the prospect of higher rates of investment as the key to unlocking the growth needed to fund government priorities. But her tone will likely be measured rather than exuberant, and she’ll use her keynote speech in Liverpool to warn again that “tough decisions” are still needed due to the UK’s tight public finances inherited from the Tories.
“There won’t be a return to austerity, there will be real terms increases to government spending in this parliament,” Reeves told BBC Radio 4 during the government’s morning broadcast round, though she added a caveat that the spending budgets for individual departments will be “negotiated.”
Reeves is under pressure to paint a brighter picture of Britain’s economic prospects having spent much of her 11-week tenure warning of the difficult measures she’ll have to take to address a £22 billion (S$37.7 billion) fiscal hole she’s inherited. That’s raised expectations of tax rises in her budget on Oct 30, with levies on inheritance, capital gains and property expected to increase.
The problem is that tax rises risk undermining the economic growth Reeves wants to achieve. Her stark warnings on the state of the public finances have coincided with a decline in consumer confidence, which has prompted calls for her to strike a more upbeat tone. They’ve also triggered warnings from corporate Britain against raising taxes on business.
Some UK businesses are adopting a “wait-and-see” approach on investing, according to S&P Global’s closely watched PMI index published on Monday.
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The chancellor has already announced measures to address the budgetary hole, including a deeply unpopular decision to cut winter fuel allowance to about 10 million pensioners. Prime Minister Keir Starmer’s party has also faced criticism over its handling of donations from Labour peer Waheed Alli, as well as in-fighting among senior aides about who wields power in Downing Street.
All of which means Reeves’s speech – and Starmer’s on Tuesday – come at a pivotal time for a party that swept to power on a landslide just under three months ago after 14 years in opposition. An Opinium survey on Saturday showed Starmer’s approval ratings have dropped below those of former Tory premier Rishi Sunak. An Ipsos poll published Monday found more than six in 10 Britons are dissatisfied with how the government is running the country.
The chancellor is expected to urge patience, while setting out more clearly how the government expects the economic picture to play out in the long-run.
“I can see the prize on offer, if we make the right choices now,” Reeves will tell the conference, according to pre-briefed remarks from Labour. “Growth is the challenge and investment is the solution.”
During her broadcast round, Reeves told the BBC she would appoint a Covid commissioner to investigate £674 million worth of pandemic-era contracts that are “in dispute.” She also told BBC Radio that she would not introduce a wealth tax. Additionally, she informed Sky News that the money she received for clothing during the campaign was from an “old friend” and that she will not accept such donations while in office.
Labour’s early struggles haven’t deterred companies from turning up to the conference. The party said tickets to its business day – costing £3,000 each – sold out within 24 hours. About 500 corporate leaders will attend, including over 100 chief executive officers, presidents and chairpersons from companies such as HSBC, Blackstone, Santander, Uber, JP Morgan and ExxonMobil.
“Getting the next six weeks right, I feel, will be really important to people interested in investing here, or to attract people from outside,” Lloyd’s of London chairman Bruce Carnegie-Brown told Bloomberg Radio.
Reeves will seek to answer her critics by arguing that she needs to address the UK’s challenging public finances before growth can be achieved. She’s delayed a raft of road and hospital-building projects due to lack of funds, and needs a wave of private sector investment to plug the gap and generate the growth that she and Starmer say is Labour’s defining mission in power.
“Stability is the crucial foundation on which all our ambitions will be built, the essential precondition for business to invest with confidence and families to plan for the future,” she is due to say. “We will make the choices necessary to secure our public finances and fix the foundations for lasting growth.”
The UK is due to host an international investment summit on Oct 14, and Reeves sees the event as being of critical importance, a person familiar with her thinking said on condition of anonymity.
Reeves’s strong language on “no return to austerity” – combined with her pledge to address the fiscal deficit – is a further hint that she’s planning a tax-raising budget at the end of next month. She’ll reiterate election promises not to raise income tax, national insurance, value added tax or corporation tax. That suggests increasing taxes on capital, pensions and property is in scope.
Both Reeves and Starmer understand the political risk if Labour is seen to bring in austerity, and the prime minister used an interview with the Sunday Mirror newspaper ahead of the conference to rule it out, saying “we are still feeling the damage” from the Tory policies from 2010.
“We’re going to deal with the difficulties in the economy in the Budget and we’re going to deal with it straight away,” he said. BLOOMBERG