Did UK Chancellor Rachel Reeves lie and should she quit?
Rachel Reeves is accused of misleading voters and ministers over the state of the public finances in the run-up to the budget. What does this mean for her future?
Rachel Reeves is facing accusations that she lied by failing to disclose to voters that the public finances had significantly improved in the run-up to her budget. So what did she claim at the time and what do we know now? Did she lie? And could she be forced to leave Downing Street?
What did the Chancellor say?
On November 4, three weeks before the budget, Ms Reeves held an extraordinary press conference. She used it to signal that a downgrade in the public finances by the Office for Budget Responsibility meant that taxes would have to rise.
She said: “That (the productivity downgrade) has consequences for working people – for their jobs and for their wages, and it has consequences for the public finances too, in lower tax receipts.”
She signalled that she would break the Labour manifesto and raise income tax. She also made clear that she had made “choices” not to return to austerity – meaning she would protect public spending – and that she wanted more fiscal headroom to act as a cushion against future changes in the public finances.
But it is what the Chancellor did not say at the press conference – that the public finances had actually improved because of higher tax receipts, offsetting the productivity downgrade – that is now the subject of intense political debate.
What do we know now?
In an unusual intervention, the head of the independent budget watchdog wrote to the Treasury select committee after Ms Reeves presented her budget outlining the economic projections it had made in the run-up to the statement.
Richard Hughes said he was taking this “unusual step” because of the intense speculation on the subject before budget day, November 26, and because he wanted to address “misconceptions” in a clear criticism of the Treasury.
The OBR’s letter revealed that it had informed Ms Reeves as far back as September 17 that there had been a significant improvement in tax revenues because of higher inflation, wiping out most of the productivity downgrade. By October 31 – four days before Ms Reeves’s Downing Street press conference – the deficit had turned into a surplus: Ms Reeves was £4.2bn ($8.48bn) in the black.
Yet at no point in her Downing Street press conference did Ms Reeves make this clear. She chose to highlight the bad, omitting the good. This has led to accusations that she at best misled the public and at worst lied.
What is Reeves’s defence?
The Chancellor has insisted she did not mislead voters about the state of the public finances.
She points out that the OBR had downgraded its estimates for productivity in the economy by £16bn and that while a £4.2bn surplus might sound like a lot of money, in the context of the £1.3 trillion of annual government spending it is a tiny amount.
She also says that the £4.2bn figure did not include the cost of £7bn worth of government U-turns on welfare spending that would have to be factored into the budget accounts. So instead of a £4.2bn surplus, Ms Reeves claims she was actually facing a £2.8bn deficit.
This, she says, was also before factoring in the need to give herself more “headroom” in the budget against future economic shocks.
In March she gave herself £9.9bn of headroom – an amount seen by most economists as too low. Before the budget the Treasury had indicated it wanted to increase this headroom.
So in effect, the Treasury argues, if Ms Reeves wanted to give herself £22bn of headroom (which she did in the budget) on November 4, she was looking at a total deficit of £24.8bn. Therefore, the claims she was misleading were untrue.
Does this defence stack up?
Ms Reeves’s critics – including fellow cabinet ministers – still argue she was misleading. They point to the fact that the welfare U-turn and her decision to retain £22bn worth of headroom were ultimately policy choices: they were not as a result of the downgrade in productivity figures, which had effectively been wiped out by the improved tax revenues. Critics argue that Ms Reeves should have been clearer with the public and owned her decisions, rather than pointing to productivity downgrades.
Did she mislead voters over the U-turn on income tax?
On November 13 the Financial Times revealed that Ms Reeves had dropped plans to increase the basic rate of income tax, prompting turmoil in the financial markets amid concerns that she had bowed to political pressure.
The following morning the Treasury briefed that it was in fact because of improved forecasts, arguing “the facts had changed”. In fact those forecasts had not changed for a fortnight. The selective nature of the briefing led to further questions over whether the Treasury had deliberately been misleading in an attempt to calm the financial markets and cover for the fact this was ultimately a political decision, one borne of concerns about the potential scale of the public backlash.
What do cabinet ministers think?
Privately, they are furious. They feel they have been misled as much as voters about the reality of the improvements in the public finances. They say that if they had been aware they would have warned strongly against floating the idea that there was going to be an increase in the basic rate of income tax.
Is Reeves in any real trouble?
Reform UK leader Nigel Farage has written to Sir Laurie Magnus, Sir Keir Starmer’s independent ethics adviser, asking for him to mount a formal investigation. The Tories have asked the Financial Conduct Authority to investigate whether Ms Reeves effectively manipulated the markets. However, there is a high bar for both to carry out an investigation, and because the crux of the issue lies with something Ms Reeves did not say – rather than something she explicitly did – it is not clear whether there will be any formal inquiry.
What does it mean politically?
Ms Reeves’s budget was enough to stave off the threat of a leadership challenge. Her commitment to spending an extra £16bn a year on welfare and decision to scrap the two-child benefit cap has gone down well with colleagues. Some are calling it a “survival” budget, and ministers acknowledge it means Sir Keir and Ms Reeves are likely to make it through until May. However, to have the headlines dominated by questions over whether Ms Reeves lied about the basis for tax rises is unlikely to help with broader public opinion. Privately, ministers think it is over – it’s just a matter of time.
So did she lie?
She was certainly economical with the truth, and there was clearly a deliberate omission about the improvements in the forecasts. But whether that is tantamount to an outright lie is obviously subjective and depends – very much – on whom you speak to.
The Times
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