The Budget is a process, not an event. That has rarely been clearer than now. There is still a fortnight to go until Rachel Reeves addresses the House of Commons, but we already know her two defining judgements.
First, she will revise her fiscal rules to allow more borrowing for investment (a decision heavily trailed to prepare the markets). Second, she will raise taxes in order to better fund public services.
The identity of those taxes is also becoming clearer. By refusing to rule out a rise in employers’ National Insurance, the government has effectively confirmed it (as Reeves first did in her interview with Andrew).
That has prompted a furious debate over whether Labour is set to break its manifesto pledge. Not only the Conservatives but the Institute for Fiscal Studies have declared that it is. “It seems to me that would be a straightforward breach of a manifesto commitment,” the latter’s director, Paul Johnson, told Times Radio. “I went back and read the manifesto and it says very clearly: ‘We will not raise rates of National Insurance.’ It doesn’t specify employee National Insurance.”
To this, Labour aides have a cunning defence. During the election, they point out, the Conservatives challenged them to explicitly rule out a rise in employers’ National Insurance. They did not, prompting the Tories to include this measure in a list of “Labour’s 18 tax rises”. Call it keeping a non-pledge.
That’s the political row, what of the policy row? Business leaders, unsurprisingly, have condemned Labour’s plans. “Making every local job more expensive to maintain would hit job creation and hurt wages right across the UK,” warned Craig Beaumont, the executive director of the Federation of Small Businesses. Awkwardly for Reeves, she described Rishi Sunak’s planned increase in National Insurance as “the worst possible tax rise at the worst possible time” back in 2022.
The Chancellor would riposte that she has changed her mind because the facts have changed: she must now raise £40bn to prevent real-terms cuts to departments (not least due to the Tories’ £20bn National Insurance cut). This, crucially, would allow Reeves and Starmer to argue that they have kept their election promise to avoid a return to austerity.
As I argued back in June, Reeves was always likely to use her first Budget to impose significant tax rises. New chancellors usually do. Memories of the last government – and “the mess it left” – are freshest. Early policy priorities – investing in public services in Labour’s case – need to be funded.
This is Reeves’ defining political choice. If Labour can demonstrate that it has improved public services, No 10 believes it will have a path to re-election. To enable this, Reeves is prepared to tolerate the “howls of anguish” (as Denis Healey put it) that will accompany tax rises. The nightmare scenario for the government is one in which the Tories can argue that pain has not been accompanied by gain.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Sue Gray fell foul of Keir Starmer’s ruthless streak]
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