Rachel Reeves is stuck. At the Budget in November, she will almost certainly have to raise billions of pounds in taxes unless she is prepared to cut government spending, or risk the wrath of the bond markets by increasing borrowing.
The hefty tax rises the Chancellor brought in last year have been a drag on economic growth, with unemployment and inflation on the rise.
Reeves says she has made tricky decisions and deployed the resources of the state to boost the economy for the long term, for example by ramping up investment in infrastructure.
This is true, and it is important. But Labour’s collapse in the opinion polls shows that it is not enough. Voters feel that the Government is not doing enough to improve their quality of life and ease the squeeze that so many have experienced in recent years.
It is no use pointing out that average salaries and pensions are growing faster than inflation. People do not feel it in their pockets; instead, they see food prices continuing to rise and wonder when it will all end.
Reeves must use the Budget to fix this. Whether by reducing the price of childcare, building more low-cost housing, capping rises in utilities bills, or making transport more affordable, she needs to show that Labour understands people want a helping hand.
Labour MPs care most about the poorest and most vulnerable, those affected by welfare cuts and benefit caps. That is understandable but it does not help much politically – it is the squeezed middle which feels abandoned by Westminster.
The problem, of course, is that turning on the spending taps would bring fresh headaches. The age of governments merrily ramping up borrowing to fund the state – like Tony Blair or Boris Johnson – is long behind us, with bond markets watching Britain like hawks for any signs that the Treasury cannot pay for its commitments.
So far, Reeves has mostly filled in financial black holes through tinkering: a few billion here from a change to pension rules, a few billion there from a new system of alcohol duties.
This is a strategy of maximum political pain for minimum economic gain. Even measures which affect only a tiny minority of people – such as imposing inheritance tax on family farms – can provoke an enormous backlash, far out of proportion to the relatively small amounts of cash they bring in to the Exchequer.
If she tries to repeat this trick in November, it will surely backfire. Those who are hit with new taxes will be furious; those who are spared will not be grateful to the Chancellor.
There are some in Labour who will always point to a “wealth tax” as the solution. They deliberately ignore that no one can agree on what a wealth tax actually is, how many people it should cover and how much it would raise.
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The real answer is simple: Reeves should abandon her manifesto promises not to raise income tax, national insurance, VAT or corporation tax.
Of course it is never easy to break an election pledge. But in reality, it happens all the time, and for good reason – no political party can write a manifesto which will continue to apply to all the possible events happening over a five-year term in government.
The UK has taken an economic battering from factors beyond the Chancellor’s control, such as Donald Trump’s trade wars and the sudden jitters that investors have about the debt pile amassed by Western governments.
The Conservatives got little thanks from voters when they cut workers’ national insurance contributions by 4p in the pound; reversing that decision would be a straightforward way to top up the state’s coffers by more than £10bn a year. The basic rate of income tax has not increased for decades, even as Government spending has soared – it would clearly be reasonable to say that needs to change.
Westminster insiders from the left, right and centre are increasingly urging Reeves to have the courage to say that circumstances have changed, so policy must change with it.
The chances are that in the next Budget, the Chancellor will ignore these pleas and stick with her piecemeal attempts to top up the finances. But there is every chance she will then face the exact same dilemma next year – and in the end have to take the unpleasant decision she has merely delayed.
Ripping off the plaster now, to build a state which actually works for people, would in the long run be the safer choice.
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