Patrick Adams, Senior Consultant
08/07/2024

In an address today, Rachel Reeves, the newly appointed Chancellor of the Exchequer, laid out a plan aimed at revitalising the UK economy. Labour's manifesto prioritises delivering growth as its primary objective, in part to help meet its spending commitments. In some respects, this echoes former Prime Minister Liz Truss's economic plans.

The Labour Government has set ambitious targets. Reeves pledged to adhere to Labour's fiscal rules, assuring that there would be no increases in National Insurance, Income tax, or VAT. Additionally, she reaffirmed Labour's commitment to its economic promises, stating that the Party would not backtrack on any of its commitments. However, this does not preclude the possibility of raising taxes on capital gains or pensions.

Reeves highlighted new Treasury analysis indicating that if the UK had grown at the OECD average over the past 14 years, the economy would be £140 billion larger, generating an additional £58 billion in tax revenue. She stressed that achieving growth would require hard choices and a new approach based on three pillars: stability, investment, and reform. Sustained economic growth, according to Reeves, is essential for improving living standards in the UK, which she described as Labour's "national mission." She criticised previous governments for failing to make the tough decisions necessary to stimulate growth and outlined her initial steps towards "fixing the foundations" of the UK economy.

Reeves began by acknowledging the challenging economic circumstances she has inherited. She noted that her observations over the past 72 hours confirmed that previous governments had avoided difficult decisions, leaving the UK economy in a precarious state. This could be seen as a way to shield the government from criticism for the difficult spending decisions it will have to make such as on welfare. To address this, she instructed civil servants to conduct a comprehensive assessment of public spending, which she promised to present to Parliament before the summer recess. Some observers have interpreted this as both a political and economic exercise, as it allows her to highlight the perceived failures of the previous Conservative governments. This assessment is separate from the upcoming Budget, with a date to be confirmed in due course.

Reeves also underscored her commitment to economic stability, a message she conveyed in her meeting with the Governor of the Bank of England. Reeves declared that the UK now had a government that respects and is open to business. She promised to unlock private sector investment through a taskforce led by Mark Carney, focusing on establishing a £7.3 billion National Wealth Fund. On receiving an initial report from the taskforce, she indicated that the next steps would be announced soon. There is a debate around how this would be structured and there are fears that pension firms would be mandatorily made to invest in this system, rather than voluntarily, acting as a backstop for a lack of public funding.

This initiative indicates a return to the Private Finance Initiative (PFI). Labour aims to reduce risks for private investors and attract £3 of private investment for every £1 of public investment. The Party’s manifesto suggests private finance could be used for a wide range of infrastructure projects, including roads, railways, and energy sources. Labour proposes to utilise the National Wealth Fund to attract private investments into new technologies like hydrogen production and carbon capture, viewed as too risky without government backing. PFI contracts, a Conservative policy expanded under the Blair government, involved private sector funding and operation of infrastructure projects, repaid over time by taxpayers. These deals often proved significantly more expensive than direct public funding.

Reeves announced that the Government will reform the National Planning Policy Framework by the end of the month. She aims to restore mandatory housing targets and end the ban on onshore wind projects. She will consult on integrating onshore wind into the Nationally Significant Infrastructure Projects regime. Prioritising energy projects to ensure swift progress, she also plans to expand the Spatial Plan for Energy to other infrastructure sectors. Additionally, Reeves will create a new taskforce to accelerate stalled housing sites across the UK. Reeves said that the Department of Levelling Up and Communities, would not hesitate to review applications with significant economic implications. 

Throughout her speech, Reeves showed a willingness to face "short-term political pain" to achieve long-term economic reform, particularly targeting the UK's planning system. She argued that the current system entangles projects in red tape, stifling progress. Reeves acknowledged potential conflicts between planning reforms and environmental or social concerns but expressed her determination to make difficult decisions to "get Britain building again." This stance has the potential to bring about conflict with the left wing of the party and be a point of contention in the future as Labour fend off the Green Party encroaching on their left. In addition, Reeves has pledged to introduce a modern industrial strategy, amend the skills system to adapt to a changing world of work, address economic inactivity, and reform public services to make them future-ready. Furthermore, she committed to working closely with national, regional, and local leaders and to revising the pension system, all aimed at fostering economic growth, Labour's key policy objective.

Reeves wants to be seen as a decisive leader, distinguishing herself from previous Tory governments by being prepared to make tough, long-term decisions, as well as fiscally sound as a way to separate herself from the far left.  Her immediate challenge is to make a significant impact within the next few weeks, positioning herself as a transformative figure before the summer recess. This period serves as an important preparatory period for her team to refine their strategies ahead of the upcoming Budget and the Labour Party Conference. Today’s address was about setting herself apart, showing a readiness to tackle difficult issues head-on, and laying the groundwork for Labour’s broader economic agenda. By presenting herself as a break from the past and focusing on sustainable growth and reform, Reeves aims to solidify her position and Labour's vision for the future.