Some of Rachel Reeves’s Labour colleagues have urged her to ditch the party’s manifesto promises rather than risk a “pasty tax” budget that raises money through a string of small measures.
As the independent Office for Budget Responsibility (OBR) presented its first fiscal forecast to the Treasury on Friday, several sources said there was tension within the government over the manifesto pledges.
Labour’s manifesto before returning to power last year included a promise not to raise national insurance, VAT or income tax, which between them account for about 75% of tax revenue.
One person with knowledge of the pre-budget debate in Downing Street said: “There’s a political risk that No 10 are increasingly worried about, that we’re dying a slow death by the manifesto pledges, and the budget will look like a hodgepodge.”
Reeves remains firmly committed to the manifesto promises, however, according to colleagues, and is not asking officials to cost how much specific tax-raising measures that would involve breaching them in November’s budget might raise.
Having carried out a stocktake of its productivity forecasts over the summer, the OBR is understood to have presented Reeves with a significantly more pessimistic preliminary growth forecast last month.
Friday’s presentation is the first projection that includes forecasts for tax and spend. It is widely expected to leave Reeves £20bn to £40bn adrift of the £10bn headroom against her fiscal rules she left herself in spring, once higher borrowing costs and U-turns on winter fuel and welfare cuts are taken into account, alongside the growth downgrade.
The Treasury is hopeful of softening the blow by persuading the OBR to take into account the pro-growth impact of government policies.
“We are talking to the OBR about growth measures. There’s a lot of work going on with that,” said a Treasury source.
Against this challenging backdrop, Keir Starmer’s chief secretary, Darren Jones, fuelled debate about the tax pledges at Labour’s conference this week when he told Sky News that the manifesto, “stands today because decisions haven’t been taken yet” – a significantly weaker line than that taken by the Treasury in recent weeks.
Raising the basic and higher rates of income tax by 1p would bring in £8.5bn in year one, according to the Treasury, while 1p on employee NICs would raise £7.3bn. A VAT rise is deemed much less likely as it would feed through into inflation, which is already well above the Bank of England’s 2% target.
No 10 insiders are said to be particularly concerned about the impact of raising fuel duty, which has been frozen since 2011-12, and which rightwing newspapers would be likely to portray as an attack on the “white-van man”. Reintroducing the link between fuel duty and inflation would raise almost £5bn a year by 2029-30, according to the OBR.
Other measures understood to be under consideration include levying national insurance on landlords’ rental income; charging capital gains tax when wealthy individuals leave the country, and limiting tax relief on pensions.
With Labour keen to win back business confidence, one cabinet minister said large firms had made clear that their preference was for a manifesto-breaking increase in personal taxes, rather than a string of smaller measures. “It’s the pasty tax thing they’re worried about: 20 worthy things that raise £1bn each.”
The former Conservative chancellor George Osborne’s 2012 budget unravelled within weeks, after a furious backlash against planned changes to the VAT treatment of a series of products, including static caravans and hot foods for takeaway such as pasties.
Mentioning that disastrous statement, a senior Labour strategist said “broad-based tax rises”, such as an increase in income tax or national insurance, would be easier to explain to voters than a portfolio of smaller tweaks.
A former colleague of Starmer’s new chief economic adviser, Minouche Shafik, suggested she would have insisted on a “zero-based review” of all budget options, including broad-based tax rises.
With Reeves expected to have to raise up to £40bn, campaigners for tax reform had hoped to see Labour take on some of the long-criticised aspects of the existing system, such as by equalising the rates of capital gains and income tax.
Andy Summers, a director of the Centre for the Analysis of Taxation, told a fringe meeting at the Labour party conferencethis week: “I actually think that the government’s manifesto pledges on the main rates of tax are actually a good thing, because it is going to force, frankly, that hard thinking about structural reform of the tax system.”
However, one insider familiar with Starmer’s thinking told delegates at a recent private City event that the government had wanted to carry out significant tax reform, but had run out of time, and that the budget would more likely contain a multitude of small measures.
A Treasury source said: “We aren’t going to give a running commentary on the OBR’s forecasts. There is a lot of rubbish out there from people who claim to know what is in the budget before decisions have been made. The chancellor will make those decisions, no one else.”
