Keir Starmer promised that the last Budget would be “painful”. In a speech in the Downing Street garden in August, two months earlier, he tried to manage expectations, saying that the state of the public finances was “worse than we ever imagined”, and asked people to “accept short-term pain for long-term good”.
It was a forlorn hope. Far from “accepting” the pain, public opinion turned against the government further after Rachel Reeves announced £25bn a year of tax increases, rising to £40bn a year by the end of this parliament.
Business leaders reacted particularly badly to the rise in employers’ national insurance contributions, causing the chancellor to over-correct when she addressed the CBI the following month. She told representatives that she was “not coming back with more borrowing or more taxes”.
Oops. That was too categorical, and she immediately had to clarify: “I do not plan to have another Budget like this. I have wiped the slate clean.”
Within a few weeks, however, it turned out that it was a magic slate, which had filled up with new liabilities that would have to be paid for. Donald Trump had become president, threatening a global trade war and depressing economic forecasts. By the spring statement in March, the thin buffer between sticking to her fiscal rules and breaking them had disappeared, and she announced emergency cuts to welfare spending to restore it.
Those cuts were reversed by the Labour rebellion in parliament this week, leaving more money to be found in the Budget this autumn. “Of course, there is a cost to the welfare changes that parliament voted through this week,” Reeves said in a round of TV interviews to show a brave face after her tears in the Commons yesterday, “and that will be reflected in the Budget”.
It has been clear for months now that taxes will have to rise further. But now it is becoming obvious that the tax rises will have to be substantial. Ben Zaranko of the Institute for Fiscal Studies said yesterday: “It’s not hard to imagine a world where they are of a ballpark similar scale to last autumn. If you have the perfect storm of economic forecasts being downgraded, additional spending commitments because these reforms haven’t got through parliament, and the world is in a gloomier place generally, you could comfortably be into double-figure billions even before you talk about any retail offers. A £20, £30, £40bn Budget is not what the government would want, but it’s not impossible by any means.”
Needless to say, this is a political disaster. Mixing her metaphors, Reeves claimed last year not just to have wiped the slate clean but to have fixed the foundations. Now she is going to have to report that the problem of subsidence has not in fact been solved and that further work on the foundations is needed.
Last year, Starmer was accused by the commentators, including me, of overdoing the gloom. Reeves was accused of depressing the economy by talking it down. Now it turns out that neither of them was gloomy enough. But where they have still failed is in setting out what the eventual reward for all this pain might be.
When Margaret Thatcher administered her monetarist medicine in 1979-81, many economists thought she had overdone it and caused unnecessary hardship, but her aim was clear: to squeeze inflation out of the system by weakening the trade unions and stimulating the supply side.
I never liked her rhetoric of strength through suffering. In 1980, she compared herself to a nurse looking after an ill patient: “Which is the better nurse? The one who smothers the patient with sympathy … Or the nurse who says, ‘Now, come on. Shake out of it.’ … Which is the one most likely to get results? The one who says, ‘Come on, you can do it.’ That’s me.” But when the economy picked up in 1982-83, enough of the voters felt that the hard times had been worth it.
That was why Starmer, Reeves and Wes Streeting launched the 10-year NHS plan today. It was designed to sell the message that the pain of tax rises will be worth it if the health service can be made to work again. A functioning NHS is Labour’s equivalent of 1982’s economic recovery.
But we have had the pain, and although the NHS may have stopped getting worse, it is still some way off getting better, and now Reeves is indeed coming back for more tax rises – and on a scale that makes it hard for her to avoid hurting people on middle incomes.
Starmer and Reeves have been unlucky to take power with the public finances in a uniquely dreadful state. They ruled out tax rises so that they could win the election, then had to put taxes up. They said that this was a one-off fix to “restore stability”, but now they are coming back for more. Reeves’s tears in the Commons were an unfortunate image, and it is unfair on her, but it is an image that sums up the government’s predicament all too well.
