On Wednesday, Rachel Reeves, the UK chancellor of the exchequer, will deliver Labour’s first budget in government since March 2010. When Alistair Darling delivered the last Labour budget 14 years ago, the backdrop could not have been less propitious. The global financial crisis had upended the UK economy and the projected budget deficit for that year was £163 billion.
Back in 2010, the UK economy was being buffeted by a global crisis whereas now its problems are largely self-inflicted. The black hole in the national finances, estimated at £40 billion, has emerged largely because of the decision to leave the EU in 2016. But Keir Starmer, the UK prime minister, has not only ruled out reversing Brexit, he has also closed the door on UK membership of the Single Market and Customs Union.
The context of the budget is a high national debt , the productive capacity of the economy constrained by years of chronic under-investment, and growth limited by barriers erected with its main trading partner, the EU.
The challenge facing Reeves is that she has to plug the hole in the national finances as well as opening up new streams of funding to invest in the economy and physical infrastructure. She has promised to " invest, invest, invest” but finding the resources to do so will not be easy.
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That would be a formidable proposition for any chancellor, but despite a historic mandate in July’s election, Labour is now under pressure in the polls. A series of gifts Starmer received from wealthy benefactors, and some other issues, ensured that Labour’s honeymoon period was short-lived. Its popularity is likely to dip further after the budget.
Politically, Labour’s woes will embolden the two hard-right candidates, Robert Jenrick and Kemi Badenoch, vying for leadership of the Conservative Party and move it further in the direction of Nigel Farage’s Reform Party. If the opposition is dominated by right-wing populism, it will do nothing for political stability in the UK.
Against this backdrop, the budget is the first key economic test of the new administration. It will be a difficult balance – the public finances need to be put on a sustainable path, allowing room for vital investment, but higher taxes risk hitting growth. Spending plans need to be credible and, as in Ireland, the British government needs to pay greater attention to speed and value for money in delivering major investments. And, faced with a significant budget deficit, international investors need to be kept on board, so the government can raise cash at a reasonable cost.
Above all, after the sometimes chaotic years of Conservative rule, Reeves needs to show the public, business and investors that a more stable period is in prospect, with measures put in place to boost long-term growth.