Rachel Reeves has been a member of parliament for 14 years, so she won’t be surprised that her political honeymoon at the Treasury has been brief. Events come at you fast when you are a finance minister, events that can quickly swamp any predetermined strategy. Since the chancellor took office on July 5, an in-tray of spending requests has been piling up. Some of them have been predictable, others rather less so.

Speculation is now rife that Reeves’s budget on October 30 will have to raise taxes to stick within Labour’s self-imposed fiscal rules, rules that were co-opted from the Conservatives. With a manifesto commitment not to raise income tax, employee national insurance, VAT or the headline rate of corporation tax, levies that collectively raise two thirds of the nation’s tax revenue, attention is shifting to whether additional taxes on assets such as property, pensions and inheritance are in the pipeline.

Yet there is another way. It was something that Reeves was skilled at in opposition but shows signs of losing in government, namely fostering optimism and confidence. Both are now at risk as she pursues a rather politically motivated line that she has been handed the worst economic inheritance since the Second World War. The prime minister seems set to double-down on his chancellor’s line this week by suggesting that things will get worse before they get better.

Let’s give Reeves a bit of latitude, though. The inheritance she has received is far from golden. The public sector debt-to-GDP ratio is at its highest level since 1963. Recent real income growth has been its most sluggish since the early 1950s. Public service productivity remains lower than it was in 1997, despite the extraordinary advances in labour-saving technology over the intervening period. The economy is having to adapt to trade frictions resulting from Brexit and the energy market fallout from a war in Europe. And while Jeremy Hunt, the former chancellor, may contest it, some of the legacy bills he left at the Treasury were not appropriately accounted for. A 1997-style legacy this is not.

But to stop there with the economic scorecard would be incomplete. Household balance sheets are, in aggregate, in rude health, the unemployment rate is lower than in 44 of the past 50 years, inflation is now close to its 2 per cent target and interest rates are set to fall further. Business confidence is at an eight-year high, consumer confidence at a three-year high. Economic growth in the first half of the 2024 was faster than in any other G7 economy. The pound is at an eight-year high. I get that politicians don’t do nuance very well, but this is a decidedly mixed inheritance.

When economic data is mixed, the direction an economy takes next can hinge on the tone adopted by economic leaders. In 1997 the New Labour government helped to channel these “vibes” in what became known as the era of Cool Britannia. With many of the same people from that era now back in Westminster, should they try to dust off the script? Is this not just an invitation for superficial boosterism?

In my opinion, there is merit in a much more upbeat message. Three reasons support the idea that a more constructive tone from the Treasury, the chancellor and the cabinet can have positive economic impacts.

First, when looking across data from all big economies since the end of the pandemic, it is in the UK where consumers have shown the greatest caution. In the first quarter of the year, the British household savings rate was more than 20 per cent higher than its long-term average. Among other G7 economies the savings rate was 26 per cent lower than its long-term average. Given a choice between saving and spending, UK consumers remain disproportionately cautious of what is to come. With more confidence, particularly among more affluent and older households where much of this additional saving is concentrated, higher consumer spending can fuel a rise in growth and tax receipts that will help to offset the need for immediate tax increases.

Second, business investment remains subdued with the fallout since the 2016 Brexit referendum, meaning a loss of £35 billion a year in additional productive assets. Bank of England research released last week suggested that the hurdle rate for investment, the return that companies require to justify an investment, is an eyewatering 16 per cent. This is even though additional capital to fund investment remains widely available at single-digit interest rates.

This suggests that embedded caution remains prevalent across businesses. The confidence to lower this hurdle rate and increase total investment will come from a sense in boardrooms that things are getting better. The importance of sentiment should not be overlooked by policymakers who may be tempted to look at everything through a tax, subsidy or regulatory lens. Research by Apella Advisors in May found that only 39 per cent of new intake Labour MPs had private sector experience. This lack of applied experience of what is needed to increase risk appetite and to pursue profit threatens good judgment on how to increase business investment.

Third, perhaps most intriguingly, the recovery in economic confidence since the 2022 mini-budget has been uneven. According to a recent GfK survey, consumers are now upbeat, relative to history, about their own finances and the economic outlook. However, when people are asked about their appetite to make a big purchase, they remain cautious. Similarly, while business confidence is at an eight-year high, according to Lloyds Banking Group, finance directors are cautious about levels of discretionary spending and are sitting on significant amounts of cash. This all suggests that the corporate and household sectors are nervous about potential tax increases and a resurgence of inflation. Shifting this mindset is key for a recovering economy to kick on from a strong start to 2024.

These three points suggest that the Labour Party’s central mission to accelerate UK growth to the highest in the G7 is within its grasp, but also that it needs careful curation. The doom and gloom of recent messaging is not a costless narrative, even if it fulfils a political purpose. With the honeymoon now over, it’s time to move on to a positive, more confident message. Done effectively, it will help, if certainly not eliminate, the financial challenges mounting up in the chancellor’s in-tray.

Simon French is managing director, chief economist and head of research at Panmure Liberum