With hindsight, and not very much of it at that, it might have been better for the Labour government if its general election manifesto hadn’t been quite so unequivocal about fiscal policy.
The relevant passage may well have helped a record 411 Labour candidates be returned to the House of Commons, but it has blighted the government so badly that, in current polling trends, most of Sir Keir Starmer’s parliamentary army could lose their seats if an election were held now, and Sir Keir would find himself replaced as prime minister by Nigel Farage.
The words that have been transformed from election-winning formula to impossible burden were indeed attack-proof: “We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher or additional rates of income tax, or VAT.”
Coupled with a parallel pledge not to increase corporation tax, this left about three-quarters of the UK tax base out of bounds for a chancellor in the event of being in a tight spot and looking to raise money.
Which, as Rachel Reeves has all but admitted, is exactly where she now finds herself. The minimal “wiggle room” she managed to create for herself in last year’s Budget, the hike in employers’ national insurance contributions, turned out to be an unwise choice, given the dreadful impact it had on businesses and job creation – harming much-needed confidence and investment while doing nothing to bear down on consumption and spending. She can’t go there again.
Hence, the unprecedented “scene-setting” speech she has given, the heaviest hint yet that the infamous manifesto pledge will be breached. It isn’t a surprise, because Labour politicians from Sir Keir down no longer freely quote it, something Kemi Badenoch has made political capital from at Prime Minister’s Questions.
But this intervention by Ms Reeves is significant. The chancellor has got her excuses and reasoning out there early, so that they won’t be overshadowed by the explosive measures she’ll be releasing from the red box on 26 November. She can blame her predecessors for bequeathing a grim inheritance – Liz Truss’s mini-Budget, some fantastical public spending plans, and a hugely enlarged national debt run up during the Covid pandemic (borrowing that Labour wholeheartedly supported), to name a few.
It is also fair for Ms Reeves to point to lower global growth, thanks to Donald Trump’s trade wars, and an intentional trend towards higher borrowing costs for governments. The Office for Budget Responsibility, she warned, would be downgrading its past estimates about productivity and thus the pace of economic growth, reflecting a sustained failure to boost the productive capacity of the British economy. On balance, the “age of austerity” during the coalition government didn’t help with that, and Brexit has been a constant depressing factor since the EU referendum in 2016.
Yet she has only herself to blame for her own errors of judgement: overdoing that employers’ national insurance hit; abolishing the winter fuel allowance only to partially reinstate it, the worst of all worlds; botching the reforms to social security; and, above all, failing to ever build sufficient “headroom” into her fiscal plans in case things went wrong – which they have.
She gambled last year that she could get away with about £10bn in the way of a buffer, and rashly stated after the last Budget that she wouldn’t have to come back for more tax revenues. The think tanks warned Labour before polling day that their plans were questionable, and so it has proved.
Ms Reeves says that “each of us must do our bit for the security of our country and the brightness of its future”, as plain an indication that income tax is going up as can be imagined. Whether this distant Churchillian echo of the Dunkirk spirit impresses the voters remains to be seen. But what would undoubtedly help is some sense in the Budget that the government is also “doing its bit” to keep the tax rises to a minimum, and, in particular, has some exciting and innovative ideas about how to raise the public sector’s dismal productivity record.
What is an intractable problem – delivering higher quality services for less – can also be treated as an opportunity, with AI and other technological innovations potentially transforming healthcare. The public would also be less resentful about Labour’s broken promises if the government had a narrative about the great challenges facing the country – worsening demographics, paying for social care, fixing the skills shortages, and what used to be called “levelling up” neglected regions. She also has no alternative but to revisit welfare reform, a subject she treated in equivocal terms in her speech.
Still, she cheered the gilt markets up and, contrary to Nigel Farage’s windy predictions, there is little sign of a financial crisis so cataclysmic that it would topple the government and trigger a general election – at least in the short-to-medium term. Far from it. Ms Reeves’ desire to protect the NHS and her rejection of “austerity” means she will enjoy the support of the parliamentary Labour Party, while her determination to get a grip on the national debt has carried the markets with her. If only she’d had a little more humility in the past, and left herself a little more wiggle room.
Reeves raises the ghost of Denis Healey – the Labour chancellor bailed out by the IMF
Rachel Reeves came to reassure us… but ended up on the rack
Forget alarm-clock Britain – Reeves was talking to the bankers
Labour’s promise not to raise our taxes is out of the window
The Huntingdon knife suspect’s race should not be bullied out of the police
The world must act to stop the catastrophe unfolding in Sudan
