The Observer view: Rachel Reeves has an unenviable task, but she must stick to her plan for growth | Observer editorial

Chancellor Rachel Reeves has endured days of speculation over her future at the Treasury, triggered by the spike in gilt yields of the last fortnight. Far more important than frothy conjecture about the increasingly unlikely possibility that Keir Starmer would ask his chancellor to step aside just six months after Labour’s election victory is the fundamentals of the government’s plan to grow the economy.

Reeves has faced criticism, some justified, about her approach. But, while not offering any quick fixes for the country’s long-term structural problems, the broad parameters of her plan for growth remain sound.

Her task remains extraordinarily difficult. She does not enjoy the spoils of healthy growth, powered by the City in a way that concealed a whole host of other weaknesses, that her predecessor Gordon Brown did in the late 1990s and 2000s. She does not have access to the borrowing at almost zero cost that George Osborne did in the 2010s – borrowing he could have used to invest in Britain’s creaking infrastructure, but of which he chose not to avail himself. Instead, she’s had to contend with public finances left to her in a parlous state by the Conservatives, partly as a result of their political choices, including over Brexit, and partly as a result of the pandemic, followed by the global energy crisis; a neglected and underpowered welfare state and public realm; and an economy that post-financial crash has suffered from weak productivity growth, anaemic living standards and low levels of investment.

Labour’s electoral strategy has hindered her ability to address this unenviable inheritance. She was always going to need to raise taxes in the budget last autumn, but Labour’s pledges not to raise income tax, VAT or national insurance in its first term in government forced her to look for more revenue in more economically harmful places, notably through increasing employer national insurance contributions. This risks undermining job creation, and will hit low-wage, low-margin businesses in hospitality and the care sector particularly hard. It would have been better, and more equitable, to raise the same amount through income tax. And the extra revenue raised only takes her so far in terms of spending: her plans still rely on limiting the growth in public spending to 1.3% a year for the last three years of the parliament, an unrealistic target. She must plug further fiscal gaps through more tax rises, not spending cuts, and this time income tax and VAT should be within scope.

Reeves is also borrowing more to increase levels of public investment over the next five years in order to boost growth. This is exactly the right strategy, even though the costs of borrowing have increased significantly in recent years: productivity growth is undermined by Britain’s poor infrastructure. But how effectively the government spends this investment will be critical in shaping what medium-term effect it might have on growth. Over the past week, the prime minister has made warm noises about the economic benefits of AI; and Reeves has urged regulators to take a more pro-growth approach. None of this can substitute for a proper, cross-government growth plan, focused on concentrating public investment in the most high-reward areas – not just in funding green technology, but in a building programme of affordable housing for rent, for example.

Reeves has ahead of her one of the hardest jobs of any chancellor in recent decades. There will be more fluctuations in economic fortune, and more inevitable speculation about whether she is the politician for the job. She should ignore these distractions, but also take account of the fair critique directed her way.

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