Rachel Reeves' speech might set the tone for the rest of her time as Chancellor

Tomorrow, Rachel Reeves will be delivering a crucial address that has the potential to shape her tenure as Chancellor moving forward.

The speech is quite expected. It is likely that she will talk about the challenges she inherited from the previous administration. According to some sources, there might be a significant shortfall of £19 billion in the government's finances.

The argument that Labour is dealing with the worst economic situation since World War II is exaggerated, but there is some truth to Reeves' point about public finances. Debt levels are high and the increased interest rates are causing more money to be spent on debt repayment. The economy is not doing well, taxes are at peak levels, and public services are facing challenges. It's a difficult situation with no clear solution.

Reeves will likely address the poor state of public services in her speech. She will have valid points to make. The number of patients waiting for NHS treatment has risen to 7.6 million from 4.4 million since the last election. This is concerning because the number is increasing again recently. Prisons are at full capacity and the courts are overloaded and sometimes even falling apart. Local councils are finding it difficult to provide basic services, and schools are struggling to support the growing number of students with special educational needs. The Home Office is spending a lot of money on housing asylum seekers. The problems in public services seem endless.

This news likely didn't catch the Chancellor completely off guard. Some aspects might even be more challenging than she expected. There are likely details that the government is aware of, but the tough road ahead was always clear.

This leads us to the main reason for Monday's speech. It is about seeking political protection for upcoming actions.

Let's be honest: public services will require additional funds. Experts are suggesting salary increases of 5 to 6 percent for teachers, nurses, and other government workers. However, departments have only budgeted for around a 2 percent increase. If these recommendations are ignored, it could lead to strikes. But if they are implemented, it could cost up to 10 billion pounds.

Next, let's talk about security. In addition to the immediate financial support for Ukraine, there's also a commitment to increase defense spending to 2.5% of GDP in the future. This will be a significant investment. Additionally, there's a pledge to reduce NHS waiting times to less than 18 weeks, which will come with a price tag. The construction of more prisons is likely necessary. And we must find a way to fund the new childcare subsidies for working parents.

I could continue talking about this issue. Public services are facing challenges, and there is a gap in the budget for this year and the future that will need to be addressed at some point. The important question now is: how will we find the necessary funds to fill this gap?

In the future, it is hoped that changes in planning, investment in infrastructure, and other initiatives for growth will bring in the necessary funding. However, even if these policies are well thought out and implemented effectively, it will take some time to see results. In the meantime, Labour faces pressing issues that require immediate attention.

So, what choices do we have? Maybe borrowing would be an option. However, the government is limited in how much more it can borrow without conflicting with its strict fiscal rules - rules that the Chancellor claims cannot be changed.

Now let's talk about taxes. The Chancellor has constrained her choices in this area as well. She has stated that there will be no increases in income tax, national insurance contributions, VAT (except for private school fees), or the main rate of corporation tax in the future. So, what options does she have left for generating revenue?

There are rumors going around that she might try to collect more money through capital gains tax, potentially taxing property or stock income at the same rate as work income. She could also aim to increase revenue through inheritance tax by eliminating some exemptions for businesses and farmland, potentially raising a couple billion. Another possibility is reducing some of the excessive benefits of pension tax relief to generate more funds. She could also extend the freeze on income tax thresholds for another year without breaking her promise. The Treasury likely has a variety of ideas for increasing revenue, some of which may be more discreet than others.

The talk on Monday probably won't go into much detail about this. But it might show an understanding of the financial situation. It's better to acknowledge it now than never.

This article originally appeared in The Sun and is being reprinted here with permission.