ALEX BRUMMER: Rachel Reeves must live up to her message of HOPE

Former Labour chief secretary to the Treasury Liam Byrne deeply regrets the note he left his Conservative successors in 2010 when he declared: “I’m afraid there’s no money left.”

His letter, a tradition among outgoing ministers, left the impression that Labour had squandered its stewardship of the economy rather than saving the world after the Great Financial Crisis.

The current Chancellor Rachel Reeves and her boss Keir Starmer appear to have learned nothing from this episode.

This week, following the publication of figures showing that national debt was at its highest level as a proportion of GDP since the early 1960s, a Chancellor of the Exchequer said the new Government had “inherited the worst economic circumstances since the Second World War”.

However, although the national debt is higher than when the Conservatives came to power in 2010, the deficit is lower, as is unemployment and inflation.

Making his debut in the Treasury’s grand Churchill Room, Reeves also declared that his government had inherited “the worst set of circumstances since the Second World War”.

As if that were not enough, he added: “We are facing a legacy of 14 years of chaos and economic irresponsibility.”

The negativism, applied left and right, was part of a choreographed Labour strategy to portray the Tories as people who left a terrible legacy that will take years to erase.

Rather than offering a message of a brighter future under Labour, Starmer’s team has opted for the David Cameron-George Osborne approach of blaming their predecessors for everything.

At the heart of Reeves’ speech, in which he outlined plans to pass planning laws to build 1.5 million homes, was a promise to carry out a full audit of public finances by the Treasury. Of course, at the heart of all this was a paradox.

Here he promised to strengthen the role of the Office for Budget Responsibility, so that every fiscal event is legally required to be scrutinised (legislation included in last week’s King’s Speech), while ordering its own independent assessment.

There should be no doubt about the motive behind all this. Reeves is not going to discover that Jeremy Hunt and his Conservative predecessors were brilliant custodians of the public finances.

Their aim is to show that there is a big black hole somewhere and that, in the end, it can only be filled by increasing taxes.

This is despite the fact that taxes, at 38 percent of national production, represent the highest percentage since World War II.

Labour’s manifesto ruled out raising VAT (beyond private schools), income tax or national insurance contributions, so if new levies are introduced they are likely to target the wealthy.

What is not entirely clear is why Reeves’ exercise is necessary. The OBR is already preparing a full assessment of the public finances for an early autumn budget. So the assessment, which Reeves ordered before the summer recess, should be seen as an exercise in softening the pain ahead.

In addition, the OBR provides regular monthly updates on borrowing and government debt figures, so there is no shortage of up-to-date data for the Chancellor.

The independent Institute for Fiscal Studies has already spoken of a “conspiracy of silence” surrounding the financing of public services in light of the promises made.

An assessment of health and social care spending needs in the main parties’ manifestos found that only £1bn was allocated. However, if, for example, Labour’s NHS staffing plan were implemented, the cost could be 20 times higher.

Painting the bleakest picture of an inheritance allows the incoming government room for maneuver and time.

Last weekend, the Observer newspaper quoted a confidant of the Prime Minister as saying: “It is crucial to buy time. If we do not explain the scale of the problems, people will become frustrated with us.”

There has already been a warning from major housebuilders that high mortgage rates mean completion targets have been cut.

Barratt says he needs to catch up by buying more land and opening new sites, but none of these measures will be swift. There is some flexibility in how a Treasury audit will be conducted.

A gloomy output forecast, such as the Bank of England’s, will result in a much larger budget deficit than a more positive outlook.

According to the latest forecasts from the International Monetary Fund, due to be published on Wednesday, growth will rise by 0.7% in the first three months of 2024, with a similar figure achievable in the second quarter. This has already led to a radical change.

Higher output means more VAT tax revenues as people spend. An analyst at the Office for National Statistics said the economy was “very active” in the first quarter. That should mean more income and corporate tax revenues.

The danger is that Labour, by portraying the economy as a fiscal disaster, creates a self-fulfilling prophecy. For the moment, the markets are on the side of the pound and stock markets are excited by the prospect of stability.

A negative evaluation could undermine this increase in confidence. The Chancellor must be careful what she wishes for.

August could be a tricky month for markets. As big traders retreat to their yachts, subordinates take the opportunity to add to their bond pots. Giving traders ammunition to sell UK assets could be risky.