The Labour Government is not being entirely honest with you. Barring miraculous economic growth or even bigger cuts to the welfare bill, tax rises are on their way.
In modern political discourse, everything is denied until it happens. The winter fuel U-turn wasn’t happening, until it did. Partygate never happened, until it did. Tax rises aren’t happening, until they’re announced.
Like Schrödinger’s cat, simultaneously alive and dead, governments stick to their line even when all reasonable people know what’s coming. “No plans, no plans, no plans,” they say, until one day, there are plans. I like to think of it as Schrödinger’s comms.
It’s not a particular failing of this Government. One of Rishi Sunak’s team once denied the Windsor Framework deal was done. It unravelled the thorny question of the Brexit-era Northern Ireland Protocol. They denied it was done even as the former prime minister was in the car on the way to sign the agreement. I suppose technically the deal hadn’t been done; he hadn’t got his biro out.
The original sin of this current administration was at the general election when Sir Keir Starmer and Rachel Reeves obfuscated their tax plans. But they were no worse than the Tories who made the extraordinary and outlandish claim they could get the tax bill down by £17bn a year.
After Labour’s spending splurge on Wednesday, economists now seem all but united in their view the Chancellor will have to raise taxes in her autumn Budget to maintain levels of expenditure. That’s even before the Government makes the jump from spending 2.6 per cent of GDP on defence in 2027 to its aim of 3 per cent in the next parliament.
Reeves has gambled billions of pounds on infrastructure spending in the hope she can “renew” Britain before the next election. But she’s got to find more cash from somewhere, not least to pay for the winter fuel U-turn.
“Ms Reeves is now going to have all her fingers and all her toes crossed, hoping that the OBR [Office for Budget Responsibility] will not be downgrading their forecasts in the autumn. With spending plans set, and ‘ironclad’ fiscal rules being met by a gnat’s whisker, any move in the wrong direction will almost certainly spark more tax rises,” Paul Johnson, of the Institute for Fiscal Studies, said on Thursday.
Ruth Curtice, chief executive of the Resolution Foundation, agreed. “A weaker economic outlook and the unfunded changes to winter fuel payments mean the Chancellor will likely need to look again at tax rises in the autumn,” she said.
Earlier on Thursday, Reeves did a broadcast round of TV and radio stations. “Will there be tax rises?” every single interviewer asked. In this discourse, nothing happens until it does.
“I think it would be very risky for a Chancellor to try and write future Budgets in a world as uncertain as ours,” she told LBC’s Nick Ferrari. “I won’t have to repeat a Budget like the one that I did last year.”
To be fair to Reeves, she’s just completed a spending review and won’t have started work on the autumn Budget yet. She will be hoping the OBR scores her projects up and not down to boost her growth numbers. But no one watching or listening to her set of interviews could be left in much doubt as to what is coming.
Labour has stressed the need for fiscal discipline since taking office, with Reeves repeatedly describing herself as an “iron” Chancellor. However, Wednesday’s spending review marked an inflection point: a change of tone. Reeves, sometimes criticised by her own backbenches as being too right wing, returned to well-trodden Labour byways, ramping up spending on the NHS.
After Health Secretary Wes Streeting managed a break in the sun in the run-up to the spending review, Reeves took to archly asking other Cabinet colleagues if they were planning on taking holidays too. Streeting, still tanned this week from his jaunt, has taken to joking he’s been basking in the warm glow of His Majesty’s Treasury.
Government insiders have repeatedly insisted it was always the plan to take the most difficult decisions early on and then shift to more Labour-friendly policies once the public finances had stabilised.
That’s the narrative the Government is spinning behind the winter fuel U-turn: that it’s only possible now they’ve stabilised the public finances. But is that even true? It depends, as ever, on which measure you use.
While gross domestic product (GDP) – which broadly measures the size of the economy overall – expanded by 0.7 per cent in the first three months of the year, productivity in both the public and private sectors has contracted. Meanwhile, inflation is sticky, and the labour market is not in a good place.
Reeves’ changes to national insurance contributions have hit the retail and hospitality sectors especially hard. Employment has fallen by the most in five years, with 109,000 jobs shed in May, according to Office for National Statistics figures published this week.
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Investors have driven up the UK’s borrowing costs, as reflected by higher yields on sovereign debt. That’s a whole chunk of change to find down the back of the sofa if you’ve only got £10bn of wriggle room to avoid overspending.
There are also ambitious targets to reduce waste. A total of £14bn of “annual efficiency gains” were identified, £2bn more than had been expected. They will have to be found otherwise the Government will tip into overspending.
The Chancellor looked relaxed and relieved on Wednesday evening at the customary post-statement knees-up the Treasury’s local, the Two Chairmen.
But the morning after, data showed the economy suffered an unexpectedly sharp slowdown in April. Reeves dismissed these monthly figures as “notoriously volatile” saying it was a challenging month because of Donald Trump’s tariffs. Business surveys are “all ticking up” and “confidence is returning,” she assured the BBC.
If, as expected, the economy continues to perform sluggishly and those growth numbers don’t materialise, Reeves may need to change tack.
This is a Labour Party which has shown itself allergic to spending cuts – the Government is poised for a rebellion on its welfare plans in mid-July. At that point, tax rises may be the only way out. Just don’t ask about them in advance. Don’t let Schrödinger’s cat out of the box. Nothing is true until it happens, especially tax hikes.
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