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【Text/Observer Network Yang Rong】

On July 29, the new British Chancellor of the Exchequer, Rachel Reeves, will announce the results of the fiscal review to Parliament. According to Reuters on the 27th, the British Prime Minister's Office announced on the same day that Reeves' report will reveal that Britain is "broke and broken" after 14 years of Conservative rule. British media previously disclosed that the Labour government will then announce an estimated public finance gap of 20 billion pounds (about 186.4 billion yuan).

According to a statement released by the office of the new British Prime Minister Keir Starmer on the 27th local time, "(Reeves') assessment will show that Britain is broke and fragmented, exposing the chaos caused by populist politics to the economy and public services." "It will show that the previous government promised a lot of money for this fiscal year without knowing where the money would come from." The statement reads.

In the British House of Commons election on the 4th of this month, the Labour Party defeated the Conservative Party with an overwhelming advantage, taking advantage of voters' dissatisfaction with the UK's sluggish economy, public service crisis, and increase in illegal immigration. British media said that in the past three weeks, the Labour Party has been trying to convey a message to the public: the situation in almost every public policy area is worse than expected.

The Labour Party called the public finance gap left by the Conservative government a "black hole", saying that the Labour government inherited the "worst economic situation in the UK since World War II". According to Labour Party sources, in the report on the 29th, "the British public will finally see the true scale of the damage caused by the Conservatives to the public finances". According to a report by the British "Guardian" last week, citing sources, Reeves is expected to disclose a funding gap of 20 billion pounds.

The Conservatives refuted the Labour Party's claims as "pure fabrication" to find an excuse to increase taxes in subsequent budgets. Conservative Shadow Chancellor of the Exchequer Jeremy Hunt said: "Since we set up the Office for Budget Responsibility (OBR) in 2010, (government) accounts have been made public, and they show healthy economic growth, not the fictitious story that the Labour Party is now selling and widely denied by independent commentators."

Hunt said: "Their motive is clear: they promised not to raise taxes 50 times before the election and now need an excuse, but trying to deceive the British people so soon after being elected is a high-risk strategy that is doomed to fail." Hunt also argued that "through welfare reform, productivity and pay restrictions", the new British government "has every chance of balancing the budget and even continuing to reduce some taxes."

The British Broadcasting Corporation (BBC) believed on the 27th that the Labour Party may have indeed discovered some "unexpected circumstances", but its statement was largely intended to construct a political narrative. However, this strategy is not new. The Conservative Party did something similar when it came to power in 2010: they accused the Labour Party of causing the economic collapse and the extremely poor public finances, and used this as an excuse to start the largest austerity policy since World War II.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), a British think tank, said it is difficult for the public to know how big the gap in public finances is because it depends on how much the government wants to spend. The Labour Party has promised not to raise taxes on "working people", including national insurance, income tax and most aspects of value-added tax, which is also the largest source of government revenue. "Given the restrictions they have imposed on themselves, it is not impossible to increase taxes significantly, but it will be quite difficult," Johnson said.

Michael Saunders, a British economist and former external member of the Bank of England's Monetary Policy Committee, said in a report this week that Reeves' review could justify a significant increase in taxes, perhaps between £10 billion and £25 billion. "Any political cost of a tax increase could be offset by Labour's majority and using the cover of the review to shift the blame to the weak fiscal position left by the previous Conservative government."

IFS data shows that Reeves can take tax increases including increasing taxes by about 3 billion pounds a year by limiting inheritance tax relief on agricultural and business assets, including pensions in the scope of inheritance tax, and abolishing capital gains tax on inherited assets. However, the Guardian pointed out that the approach of targeting inherited assets or pension savings is highly controversial and may attract severe criticism from the Conservative Party.

In addition, the independent pay review body recommended a 5.5% pay increase for British public sector employees in 2024/25, a figure far higher than the inflation rate of 2%, but Reeves' allies revealed that she was "very likely" to fully adopt these recommendations in her report on the 29th. It is reported that this is expected to increase costs to the treasury by about 8 billion pounds a year. According to the Financial Times, Reeves may postpone some road and hospital construction projects, which originally cost about 9.7 billion pounds.

The UK's GDP grew by 0.7% in the first quarter, which was considered better than expected. However, the BBC reported that local residents did not feel a significant improvement in their quality of life. The Bank of England's benchmark interest rate is still at a 16-year high of 5.25%, which directly raises the borrowing costs of the public and businesses, and also slows down the pace of housing construction. Reeves mentioned that in order to fulfill the Labour government's plan to build 1.5 million new homes, the Labour Party will also actively attract private investment in this regard.

Ben Zaranko, a senior economic researcher at the IFS, pointed out that this year is a "critical year" for the UK Treasury. He said that 2024/25 is the last fiscal year of the spending review plan formulated by former Prime Minister Sunak when he became Chancellor of the Exchequer in 2021, but the spending under the plan was largely brought forward, and the high inflation rate has reduced the actual value of this year's public service budget by about 15 billion pounds compared with the 2021 plan.

For the British government, tax reform should not be too radical. In September 2022, then-Prime Minister Truss attempted to implement the most radical tax cut plan in 50 years, planning to exempt up to 45 billion pounds of taxes by 2027. However, the policy immediately aroused concerns about the further expansion of British debt and escalating inflation. The market panic triggered a series of turmoil, including the pound sterling exchange rate falling to a historical low, British government bonds being sold off, and pension funds facing a liquidity crisis.

Although the Truss government eventually made concessions, appointed a new chancellor and withdrew the tax cut plan, these moves failed to help Truss retain his position as prime minister. Faced with pressure from all walks of life, Truss announced his resignation as prime minister in October 2022, becoming the shortest-serving prime minister in British history (45 days).

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