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Rachel Reeves has insisted she did not lie about the state of the UK public finances ahead of the Budget in an attempt to soften up the public for tax rises, as the chancellor seeks to fend off growing criticism.
Reeves has been accused of exaggerating the idea of a black hole in the public finances to justify tax rises to fund higher welfare spending. Asked by Sky News on Sunday if she had lied, she replied: “Of course I didn’t.”
In last week’s Budget Reeves raised taxes by £26bn, lifting the overall tax burden to 38 per cent of GDP by the end of the parliament. This mostly went towards building a bigger “fiscal buffer” and paying for higher welfare spending, although there were also some measures to address the high cost of living.
In the lead-up to the Budget the government had emphasised the £16bn negative impact of weaker productivity on tax revenues, while staying silent on the fact that most of this would be offset by stronger wage and inflation assumptions.
In a speech on November 4, the chancellor gave an unusual Downing Street press conference warning she would have to ask everyone to “contribute” to repairing the public finances after years of poor productivity growth.
Yet on Friday it emerged that the Office for Budget Responsibility, the fiscal watchdog, had told Reeves on October 31 that she was set to meet her fiscal target of balancing the current budget in 2029-30 with a £4.2bn surplus.
That figure reflected an assumption that the stronger wages and inflation would balance out most of the £16bn negative impact of lower productivity forecasts.
Reeves told the BBC on Sunday that she had always been clear that she wanted to build up greater resilience for the public finances.
“If I’d said . . .£4bn is fine, there was no economic repair job to be done, you would be saying rightly that’s not good enough, it would have been the lowest surplus that any chancellor ever delivered against their fiscal rules,” she said.
The chancellor was challenged about her previous claim that she had no choice other than to put up taxes because of the productivity downgrade, despite knowing about the other, more positive factors affecting the public finances.
“I do not accept that at all. The OBR numbers themselves, which I agree with . . . they are very clear that there was less fiscal space than there was just a few months ago in the spring and we needed not less but more fiscal headroom,” she said.
“I clearly could not deliver a Budget with just £4.2bn. There was a downgrade in the headroom from £9.9bn to £4.2bn and I was very clear . . . I didn’t want to have less headroom, I wanted to have more.”
On Saturday Sir Mel Stride, the shadow chancellor, wrote to the Financial Conduct Authority accusing Reeves of “market abuse”.
The Tory MP said the chancellor’s comments in the run-up to the Budget had been misleading and caused volatility in financial markets.
The Conservatives are also seeking an urgent question in the House of Commons on Monday to try to force Reeves to explain herself to MPs.
On Sunday Reeves acknowledged that higher inflation would mitigate the damage from forecast downgrades to public finances but pointed out that some of her Budget measures would drive down inflation in the coming months.
She repeated her claim that her Budget was designed to do three things: tackle the cost of living crisis, cut NHS waiting lists and bring down government borrowing.
The chancellor placed less emphasis on her welfare decisions, which cost a cumulative £10bn of tax rises in the Budget.
Reeves needed that money to pay for ending the two-child benefit cap and to fund previous U-turns on cutting winter fuel payments for pensioners and reforming disability payments.
In her BBC interview she insisted she had been “upfront” earlier in the year about the fact that abandoning those cuts would cost billions of pounds.
