Rachel Reeves raised taxes by £40bn in last October’s Budget, and now she is hinting at even further increases – Jordan Pettitt/AFP
Sir Keir Starmer, to his party faithful in Liverpool for last week’s annual conference, said: “A Labour party that cannot control spending is a Labour Government that cannot govern.
“This is why the fiscal rules are non-negotiable.”
Rachel Reeves won’t deliver her Budget statement until Nov 26, over seven weeks away. But much of the Labour Party is already screaming that the Chancellor must open the spending sluice gates.
Debt interest costs – the rate large global investors charge to lend much of the £15bn to £20bn the British state now borrows most months – are easily the highest in the G7.
The annual interest bill is now twice what the Government spends on defence each year, more than the state spends on schools. But hundreds of Labour MPs and tens of thousands of activists – who have the power to remove Starmer – are determined that the Government borrow and spend even more.
A pre-conference remark from leadership hopeful Andy Burnham about “getting beyond this thing of being in hock to the bond markets” sparked much criticism. The Manchester mayor says he is being “deliberately misinterpreted”, but words like that tend to stick.
Amidst growing concerns about a 1976-style fiscal meltdown – when a Labour government went “cap in hand” to the International Monetary Fund for a bailout – Burnham has caused much head shaking among bond traders and other serious financial analysts.
Was a man who could soon be Prime Minister suggesting the British Government renege on its debts? Obviously not. But what Burnham said appealed to plenty of MPs and activists with zero financial knowledge who insist Labour Governments exist only to spend more and wave away budget constraints, as the canny Manchester mayor will have known.
While attempting to reassure febrile bond markets, Starmer barely mentioned the Conservatives, referring endlessly instead to Reform UK. Reeves, in contrast, peppered her conference speech with digs aimed at His Majesty’s Official Opposition.
“Don’t ever let anyone tell you there’s no difference between a Labour government and a Conservative government,” she robotically delivered no less than four times.
Why? Because the Chancellor is trying to persuade the Office for Budget Responsibility to maintain GDP growth forecasts rosy enough for her to meet her fiscal rules – that the national debt should be falling as a share of GDP by 2029-30, the scheduled end of this Parliament.
The OBR will refuse, not least because it’s downgrading its productivity growth predictions – as I outlined last week – and that means lower predicted GDP growth.
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When that happens, to meet the fiscal rules, Reeves will then break Labour’s manifesto pledge not to raise one of the “big three” taxes – income tax, national insurance contributions (NICs) and VAT – blaming the OBR’s productivity downgrade on “fourteen years of the Conservatives”. That’s the argument she began rolling out in her Tory-heavy conference speech.
The Chancellor raised taxes by £40bn in last October’s Budget – her “once in a generation” move. But she is now hinting at further increases in November, claiming her choices had been made “harder by harsh global headwinds” – an elliptical reference to President Trump’s tariffs.
However, incoming tariffs on exports to the US were on the cards for a long time and, for the most part, have been significantly watered down since being unveiled in early April. And tariffs facing Britain are considerably lower than for European Union nations – thanks to Brexit, which, despite the referendum, Reeves and Starmer tried desperately to stop.
With the “world has changed” line unlikely to placate many, and despite November’s Budget being almost seventeen months since taking office, Labour will try to shift the blame.
“The Tories piled up mountains of debt with no productivity to show for it”, said the Prime Minister, in one of his few references to the Conservatives, paving the way for the line Reeves will use after the OBR hems her in.
Yes, Labour inherited a national debt approaching 100pc of GDP. And UK productivity – given skill shortages, poor infrastructure, and a broader lack of investment – has indeed been sluggish for years.
But it was Labour’s £25bn tax hike and the combination of higher employer NICs – not a manifesto-breaker, says Labour – and the impending Employment Rights Act that explains a sharp hiring slowdown, causing GDP growth to slump.
With the UK’s composite PMI index at just 50.1 in September, and values in this survey of business sentiment below 50 indicating to economic contraction, Britain could soon be in recession.
However, if Reeves pulls the tax lever in November and the economy stalls further, generating even less tax revenue, bond markets will become properly concerned, causing gilt yields to spike and possibly necessitating emergency measures.
Income tax, VAT and NICs accounted for £648bn of total Government revenues of £1,136bn last year, almost 60pc of all receipts. Increasing the rate of any would raise money in the short run. However, in the medium term, with more and more analysts concerned that higher tax rates will further dampen growth, undermining rather than boosting revenues, the jury is still out.
The 10pc of taxpayers with the largest incomes contribute over 60pc of income tax receipts, up from half at the turn of this century. Reeves is rumoured to be raising the top rate from 45pc to 50pc, even though when then-Chancellor George Osborne lowered the top rate in 2012, revenues rose – showing that the Laffer curve is real, and Britain may be beyond the peak, with higher tax rates weakening our fiscal position.
Polling by Bradshaw Advisory suggests almost 90pc of company directors are concerned about Reeves’s Budget, with around 70pc wanting the Chancellor to cut taxes, even if that means lower spending.
As they know, Labour’s growth-sapping tax rises are already stalling the economy – and, come late November, Reeves will compound that error.
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