‘Impossible trade-offs’ if no UK economic growth – Reeves

Rachel Reeves has said a Labour government would have to make “almost impossible trade-offs” on tax and spending if the economy fails to grow.

The shadow chancellor said expanding the economy would be the only way to increase cash for public services.

“Unless you get growth…you’re always going to have to make almost impossible trade offs”, Ms Reeves told the BBC.

She made the comments before a major speech to business and finance leaders on Tuesday.

In her speech at the annual Mais Lecture in the City in London, the shadow chancellor vowed Labour will seek to bring about a “new chapter in Britain’s economic history”.

She promised to reform the Treasury as part of a possible Labour government’s economic policy.

“I remain an optimist about our ability to rise to the challenges we face,” she said. “What is demanded is a fundamental course correction. The stakes have rarely been higher.”

The Conservatives have suggested Labour had “no plan – just more borrowing and more taxes”.

Ahead of her address, Ms Reeves told the BBC that Labour would not be able to do things “as quickly as we we wanted” if voted in, adding that she was “under not illusions” of the challenges

“In the end, you can’t just tax and wait a better public services,” she said.

“You’ve got to grow the economy and reform those public services. Growth is essential to do everything else that a Labour government would want to do, including investing in the public services which are frankly on their knees after 14 years of Conservative government.”

In her speech, the shadow chancellor confirmed details about Labour’s approach to controls on borrowing, the setting of interest rates by the Bank of England and how it would return the economy to long-term growth.

The Mais lecture is a prestigious gathering where chancellors, shadow chancellors and Bank governors have outlined their principles for running the economy in front of an audience of City financiers and economists.

In their time Nigel Lawson, Gordon Brown, George Osborne and then Chancellor Rishi Sunak have laid out their economic strategy for years to come.

Ms Reeves said in her speech she would reform the powerful institution she hopes to head, the Treasury.

She suggested the Treasury has not been sufficiently focused on growing the economy in its tax and spending policy. She proposed to bring back a unit focusing on growth and high productivity to feed into key decision making for Budgets and spending reviews.

The official forecaster, the Office for Budget Responsibility (OBR), would also get a beefed-up role in advising on long-term spending that helps growth, if Labour were to be elected.

This would acknowledge and fix a problem at the Treasury rather than “set fire to it”, aides said – an apparent reference to the brief premiership of Liz Truss, whose tenure caused caused turmoil on the financial markets.

Ms Reeves said Labour would “not waver from strong fiscal rules”, and it would continue with the Conservative’s current rule that public debt must be falling as a share of the economy by the fifth year of an official forecast.

She added she would end the ability of chancellors to “scrap” fiscal rules, which are set to dictate spending and taxation policies, unless the OBR “declared the UK was in an economic crisis”.

A key aim of Ms Reeves’ speech was to promote business investment and long-term growth. This aim is shared by almost everybody in politics, including the current government, but the shadow chancellor suggested the world had changed after the pandemic and energy crisis, which pointed to a need for a more “active government”.

The Confederation of British Industry’s chief economist Louise Hellem said it was “right that the strongest route to sustainable growth is unlocking business investment”.

“With a potential cocktail of squeezed public finances and limited fiscal headroom, creating the right operating environment for firms to generate the ideas, jobs, and opportunities that the UK needs to thrive will be the defining challenge for whoever forms the next government,” she said.

But Unite union general secretary Sharon Graham said Labour needed to be “focused on delivering good jobs, public services and dignity in retirement, not more rhetoric about abstract economic concepts”.

“If you stick to phoney fiscal rules, rule out taxing the wealthy and pander to the profiteers, you end up in a straitjacket of your own making,” she said.

Some of the rhetoric chimed with the so-called Bidenomics policies pursued in the White House. But Ms Reeves hopes to achieve the same green growth, without the significant levels of borrowing. There were no new tax and spending policies announced at the speech.

Instead, investment will be needed from private companies across all of industry, enticed by significant changes to planning and industrial policy. Tuesday’s lecture is part of a two-way charm offensive between the opposition and major businesses, as an election starts to loom.

“There are no easy answers, no quick fixes, and no shortcuts. What is demanded is a decade of national renewal, shaping the institutional architecture of the British economy in the direction of mission-led government,” she said.

“If we can bring together public and private sectors, in a national mission – directed at restoring strong economic growth across Britain.”

Earlier this month, Chancellor Jeremy Hunt set out the government’s tax and spending plans in his Budget, including a cut to National Insurance and an expansion of child benefit.

Following Ms Reeves’ speech, Bim Afolami, economic secretary to the Treasury and City minister, said “all that it showed was Rachel Reeves couldn’t say anything she’d do differently, because everyone knows Labour don’t have a plan.

“All that they offer are unfunded spending promises that will lead to higher taxes and lower take home pay for ordinary people.”