The Casablanca chancellor has boxed herself in on filling the black hole in public finances

Sky's Paul Kelso says while Rachel Reeves's public show of shock over the state of the public finances is understandable, she has already limited her ability to deal with it.

Paul Kelso

Business correspondent @pkelso

Friday 26 July 2024 13:15, UK

Why you can trust Leading wesley

Rachel Reeves will echo one of the great cameos in cinema history on Monday, when she updates Parliament on the findings of a Treasury audit of the public finances.

Channelling Claude Rains' masterful turn as Captain Louis Renault in Casablanca, she will tell MPs she is shocked at the state of the public finances, and blame the mess on the vanquished Conservative government.

In Casablanca, the gag is that Captain Renault has long known Humphrey Bogart's Rick is running a casino in the back of his eponymous cafe.

In fact, he's one of his most regular customers.

Money latest: What's going on in the mortgage market?

The accusation that will face the chancellor is that, like the morally pragmatic Renault, she is feigning surprise for political ends.

That the public finances are in a dire state is not in question. Public services are strained to record levels, from NHS waiting lists to overcrowded prisons, with staff recruitment and retention strained by a widening pay gap with the private sector.

The tax burden is already at its highest level since the Second World War and the national debt is running just shy of 100% of GDP, costing nearly £90bn a year in interest payments to service.

It is of course legitimate for a chancellor to ask her new officials to put a figure on the scale of the challenge.

I understand Reeves's audit will add to the picture, putting figures on projects and problems not included in current spending plans, including perhaps the justice system, immigration and looming one-off costs, such as compensation for victims of the infected blood and Post Office scandals.

And it is both undeniable and politically irresistible for her to point to the Conservative government's management of the economy, both in the past and in assumption for the future.

In his last budget, Jeremy Hunt pencilled in public spending increases of just 1% for each of the next five years, a figure that implies unsustainable austerity-level cuts to unprotected departments - which even the OBR described as "worse than a fiction" for its lack of detail.

Most of this has been clear for months, however. Much of it was set out in detail by the Office for Budget Responsibility (OBR), and the promise to address it was at the heart of Labour's promise to the electorate.

Throughout the election campaign, economists and commentators pointed out that neither of the main parties addressed the looming hole in the public finances.

The Institute for Fiscal Studies called it a "conspiracy of silence", and is about to be proved right in its prediction that in office a new chancellor would throw open the books and claim astonishment.

If there is a cold political logic to not scaring the electorate about what lies ahead, Ms Reeves and Labour now have to face the economic imperative with precious little room for manoeuvre.

The chancellor has boxed herself in on all sides. She has ruled out increases to the main income and business taxes that contribute 70% of government revenue, and is sticking to fiscal rules that limit borrowing in the name of stability.

We will not learn what she plans to do about filling the black hole on Monday.

But we will get a date for the budget, a spending review and perhaps a decision on public sector pay, expected to be an above-inflation 5.5% settlement for millions of workers.

We will also get the start of the softening-up process, ahead of a likely combination of some tax increases, some spending restraint, and addressing the debt calculation to provide a little more 'headroom'.

Get it right and Ms Reeves will hope that, like Rick and Captain Renault, this is the beginning of a beautiful friendship with the electorate.

The Casablanca chancellor has boxed herself in on filling the black hole in public finances

More from Business