On Monday, Rachel Reeves will deliver an update to Parliament on the results of a Treasury audit of the public finances. The Labour MP will channel Claude Rains’ iconic performance as Captain Louis Renault in Casablanca, expressing shock at the state of the public finances and placing the blame on the previous Conservative government.
The comparison to Casablanca is not just a clever reference, but a fitting one. In the film, Captain Renault has long been aware of Humphrey Bogart’s character Rick running a casino in the back of his café, and even frequents the establishment. Similarly, the accusation facing Chancellor Reeves is that her surprise over the dire state of the public finances is merely a political act.
However, the truth of the matter is that the public finances are indeed in a dire state. NHS waiting lists, overcrowded prisons, and recruitment and retention issues are just some of the pressing problems faced by public services. The tax burden is at its highest level since World War II and the national debt is nearing 100% of GDP, resulting in nearly £90 billion a year in interest payments.
It is understandable for a chancellor to ask for an accurate assessment of the scale of the challenge at hand. Reeves’ audit is expected to shed light on previously unaccounted for projects and issues, such as the justice system, immigration, and one-off costs like compensation for victims of the infected blood and Post Office scandals.
It is also inevitable for Reeves to point to the Conservative government’s management of the economy, both in the past and in their assumptions for the future. In the previous budget, former Chancellor Jeremy Hunt projected minimal public spending increases for the next five years, which would mean drastic cuts to unprotected departments. This was criticized by the Office for Budget Responsibility as being “worse than fiction” due to its lack of detail.
While much of this information has been known for some time, it was largely ignored by both main parties during the election campaign. The Institute for Fiscal Studies called it a “conspiracy of silence”, and their prediction that a new chancellor would be taken aback by the state of the public finances has proven to be true.
Now, the Labour party and Ms. Reeves must face the economic reality with very little room for maneuvering. The chancellor has committed herself to not raising income or business taxes, which make up 70% of government revenue, and is bound by fiscal rules that limit borrowing in the interest of stability.
While we may not learn the specifics of Reeves’ plan to address the black hole in the public finances on Monday, we can expect to receive a date for the budget, a spending review, and a decision on public sector pay. Additionally, it is likely that there will be a combination of tax increases, spending restraint, and adjustments to the debt calculation to create some “headroom” for the government.
The success of Reeves’ approach will ultimately depend on whether she can win over the electorate, similar to the friendship formed between Rick and Captain Renault in Casablanca. With the weight of the public finances on her shoulders, Reeves will have to tread carefully and make strategic decisions to steer the country towards a brighter economic future.
