Rachel Reeves has promised to use her autumn budget to prioritise fixing Britain’s dismal record on productivity as she sought to downplay mounting tax speculation with a focus on economic growth.
Setting out her priorities for the budget for the first time, the chancellor said tackling the efficiency of the economy through higher investment and a fresh assault on planning rules would form the backbone of her tax and spending plans.
Writing exclusively for the Guardian, she said: “If Labour’s first year in power was about fixing the foundations, then the second year is about building a stronger economy for a renewed Britain.”
However, Reeves pushed back against what she called “speculation” over tax increases being explored by the Treasury to close a yawning gap in the public finances that is estimated to reach more than £40bn.
“The months and weeks before any budget are filled with people speculating about – or claiming to know – what tax and spend decisions I will take or what the Office for Budget Responsibility [OBR] will conclude,” she said.
“This budget is no different – I get that. I will set out the decisions I take in the responsible manner.”
The chancellor’s comments come as the government braces for gloomy official figures that are expected to show the economy narrowly avoided flatlining in the second quarter.
With Labour under mounting pressure over its management of the economy, City forecasters predict that Thursday morning’s update from the Office for National Statistics will find that GDP rose by 0.1% in the three months to June.
The UK outpaced its G7 peers in the first quarter with growth of 0.7%. However, experts have blamed tax increases announced by Reeves in her first budget, last October, and Donald Trump’s trade war for a marked hit to activity.
The chancellor, aiming to shrug off the anaemic performance, argued the government was taking steps to break a “cycle of low growth” in which Britain had become trapped under Conservative governments.
Laying out one of the central themes of her budget, which could be held in November, Reeves said the government would aim to boost the productive capacity of the economy by allocating investment for infrastructure projects and ripping up planning rules.
“If renewal is our mission and productivity is our challenge, then investment and reform are our tools,” she said.
Earlier on Wednesday, the Guardian revealed that Keir Starmer was preparing to revive plans for the Northern Powerhouse Rail project, which would improve transport connections between the main cities of northern England.
Reeves has ordered Treasury officials to draw up proposals for slashing additional red tape in the UK’s planning system to speed up large infrastructure projects. “We are providing that investment and unblocking the barriers to it too,” she said.
Successive chancellors have pushed to solve what economists refer to as a “productivity puzzle” that has contributed to the UK’s sluggish growth since the 2008 financial crisis.
Productivity growth is considered one of the key determinants for raising living standards and wages over the long term. However, progress to drive up the measure of output per hour of work has stalled in recent years.
The chancellor’s renewed focus comes as the Treasury braces for a potentially devastating downgrade in productivity forecasts from the OBR, which could blow a £20bn hole in the chancellor’s tax and spending plans.
With the shortfall made worse by a weak growth outlook, higher debt interest payments, and a series of U-turns on welfare cuts, Reeves and the prime minister are laying the groundwork for tax rises and changes from September, before the autumn budget.
The Guardian revealed on Tuesday that the Treasury was looking at ways to raise more money from inheritance tax to reduce the deficit. Labour MPs have been pushing the idea of a wealth tax, but changes to inheritance tax thresholds could be similarly controversial.
Sarah Coles, the head of personal finance at Hargreaves Lansdown, said it was “hardly surprising” that inheritance tax was “back in the frame”.
It is among a limited suite of taxes that can be changed, despite the government’s commitment to not increase the basic, higher or additional rates of income tax, employee national insurance or VAT.
“The system is so fiendishly complex that there are an enormous number of rules, and therefore tweaks, that the government could consider,” Coles added.
