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(Bloomberg) — Rachel Reeves has six weeks to come up with a plan to fix the UK’s ailing public services, deliver an economic boost and lift the dour national mood — and all without blowing up the nation’s finances.

A year ago, Reeves roused the Labour Party conference, with a pledge to “restore hope to our politics” by raising living standards, investing in industry and rebuilding public services. But Britain’s first female chancellor has spent her 11 weeks in office highlighting the bleak fiscal inheritance she’s been left, signaling tax rises ahead and dialing down expectations of spending sprees in her inaugural budget on Oct. 30.

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The chancellor and Prime Minister Keir Starmer have repeatedly warned “tough” decisions are needed to balance the books. Voters were given a flavor of that in July when Reeves cut winter fuel benefits for 10 million pensioners — a decision that sparked a parliamentary rebellion. She also suspended road and hospital programs — the sort of capital investment she’s previously said is needed to get the economy firing.

As the two politicians head into their party’s annual conference again, against a backdrop of a sharp fall in consumer confidence and plunging approval ratings, they’re under pressure to strike a more positive note. The chancellor’s speech on Monday provides a first opportunity to temper the pessimism and lift the mood. But it is the vision she unveils in next month’s budget that will determine how Labour is perceived for the rest of the parliament. 

“She needs to admit some mistakes and change the tone a little bit,” said Vicky Pryce, chief economic adviser at the Centre for Economics and Business Research. 

For now, Reeves’s approach — she says she needs to fill a £22 billion ($29 billion) fiscal hole left by the Conservatives — appears more akin to that of the former Tory chancellor George Osborne, who made a virtue of austerity, rather than Labour’s Gordon Brown, who delivered fiscal stability while using off-balance sheet accounting to invest for growth during his decade in the job. 

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“Rectifying the situation requires tough choices,” she told the House of Commons earlier this month. “We will fix the foundations of our economy so that we can rebuild Britain.”

Since Labour’s landslide July 4 election victory, Reeves has axed road and rail projects, put on ice a hospital building program, and told departments to find £3.2 billion ($4.2 billion) of savings this year.

Departments have come back with proposals to scrap an £800 million supercomputer and drop a £500 million artificial intelligence plan. Flood defenses are under scrutiny. Electrification of the Trans-Pennine railway is in jeopardy and the National Health Service has been told it will not get the £37 billion needed until it reforms. Senior civil servants say privately they can’t cut further into the bone.

All of that runs counter to the then shadow chancellor’s message in her Mais lecture in March, when she railed against “the stop-go cycle of capital investment, the new ‘British disease,’  in which short-term instability inhibits investment.” So does her decision to neuter Energy Secretary Ed Miliband’s Green Prosperity Plan by slashing his annual investment pot to just £4.7 billion from £28 billion.

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There’s a debate within Labour over whether it was elected to deliver economic stability or to fix public services and prepare for the climate transition, according to people close to discussions. Some believe Labour’s promised “decade of national renewal” cannot wait even if it means altering Reeves’s “iron clad” fiscal rules. But in the Treasury, the emphasis for now is on what the government has called “fixing the foundations” of the economy.   

The tension can also be seen in the make-up of Reeves’s four-strong economic advisory council. Two of them, Spencer Thompson and Neil Amin-Smith, served her in opposition and will worry about breaking manifesto commitments on fiscal rigor. The other two — John van Reenen and Anna Valero, are growth and climate-focused economists Reeves brought in from the London School of Economics after Labour’s victory in July. 

They wrote shortly before that win that Labour’s planning reforms and an end to political chaos would not be enough to persuade the private sector to pour money into the UK. The government needs to “crowd in private investment” by spending tens of billions of pounds, the two economists said, arguing £26 billion more capital spending was needed to shift Britain’s weak growth trajectory. 

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As Reeves’ current fiscal rules stand – to pay for everyday spending out of taxes and have debt falling in five years’ time – she does not have the money. 

The chancellor’s conference speech is due to emphasize again her message that tough calls are needed to fix the public finances, a person familiar with the matter said. She will justify those choices by saying that they will set the foundations for stronger economic growth in future, they said.

That suggests the plan for now is to stabilize the nation’s finances early in Labour’s five-year term — on Friday the national debt hit 100% of gross domestic product for the first time since 1961 — before pivoting to the investment Reeves says is needed to stimulate growth. 

Andy Burnham, Labour’s mayor of Greater Manchester, told the Financial Times this week that the Treasury must be more ambitious if it is to unlock investment. “It needs to understand that growth comes from giving hope and planting seeds, rather than saying no to everything,” he said.

But Reeves’s election promises not to raise key taxes limits her scope to fund government priorities. 

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“She has boxed herself in on tax by ruling out any major tax rises, while building up incredible expectations of what Labour would be able to do, particularly on public services,” said Rupert Harrison, the former chair under the Tories of the government’s council of economic advisers. “To really move the dial on a realistic time-frame, they need to raise money.”

The danger for Reeves is that by sticking to fiscal rigor, she ends up perpetuating the problem. Not only is investment being jettisoned, wealth creators, whose work Reeves wrote in a June editorial for the Financial Times will be “the defining mission of the next Labour government,” are threatening to leave to avoid anticipated wealth-related tax hikes. 

Because of Labour’s election promises, “all that remains is hitting those with broader shoulders, but they’re the ones who invest and go out and spend,”said Pryce. “If she wants to encourage new investment and entrepreneurship, it’s not going to happen if suddenly people have to pay a lot more.”

The Institute for Fiscal Studies on Saturday backed that view, saying Reeves may end up damaging growth if she raises capital gains tax or tinkers with pensions. “A path still exists for the chancellor to raise revenue without exacerbating the worst features of the UK tax system, but Labour’s manifesto has made it a narrow one,” it said.

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The Resolution Foundation estimates Reeves needs to spend an extra £19 billion a year to fix the UK’s public services. The chancellor must also find £10 billion for the public sector pay rises she awarded in July, part of the fiscal hole she blamed on the Tories. The foundation expects her to raise employers’ national insurance, capital gains and inheritance tax to plug the gap.

The chancellor could win £20 billion of extra fiscal space by changing the debt measure in the rules governing her decisions, while the Office for Budget Responsibility may ride to the rescue with a generous forecast that gives her extra headroom. She saw its first pre-budget estimate on Thursday. 

Raoul Ruparel, director of the Centre for Growth at the Boston Consulting Group, said he expects the narrative to shift after the budget and for the tone at next March’s spending review to be far more positive. In her conference speech last year, Reeves said that “from security, comes hope.” Her strategy for now seems to be to focus on building that security in the expectation the hope will follow.

“At conference she’ll lay out those challenges we’re facing and how we’re going to deal with it,” said Labour MP Afzal Khan. “And in how we deal with it, there will be hope.”

—With assistance from Ellen Milligan and Andrew Atkinson.

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