All budgets matter: few as much as this one. Rich Britain is in a funk about capital gains tax, inheritance tax, taxes on the non-domiciled; predictions of imminent disaster are fluent in every conservative publication. Social democratic Britain is desperate to see a way ahead, a route to rebuilding. Britain’s first female chancellor, Rachel Reeves, is caught in an agonising vice between insufficient revenues and irresistible demands.
When I meet her in Downing Street, she seems entirely unruffled. She launches a spectacular attack on her Tory inheritance, implying that Britain had been facing a complete meltdown in July; and she does nothing to resist the idea that big tax rises are coming. “I think people will be in no doubt when we do the Budget: those with the broadest shoulders will be bearing the largest burden.”
The choice before Britain is “invest – or decline”. Challenged over her cut in the winter fuel tax allowance for pensioners, she gives a hair-raising account of what confronted her when she arrived at the Treasury.
But she is clear, and repeats her core warning: “I think what people will see is that we are in no way picking on one group of people… Those with the broadest shoulders are going to be bearing the burden of getting our public finances back on a firmer footing.”
On her first weekend as Chancellor, she had been told by Treasury officials that they needed to issue another £22bn of government bonds this year: “‘to be able to balance the books’. And nobody knows this. The market doesn’t know it. The Debt Management Office doesn’t know it. And the Office for Budget Responsibility doesn’t know it. And you need to tell parliament this. You need to have a plan to get a grip of it.”
By then it was already July. “We were also told,” she recalls, “that that issuance at that level, at that stage in the year, was unlikely to be able to be achieved at current interest rates. So it was an immediate crisis. And the previous government refused to face up to it. They called an election and ran away…
“And the reason they didn’t want to have a Budget in the autumn – it’s now abundantly clear – is because that would have been revealed. So they called an election to avoid having to do that in the autumn. Well, you know, we are fine with that.”
When we come on to what this means for tax and spending now, I put to the Chancellor that the Institute for Fiscal Studies (IFS) has suggested she needs to find an additional £25bn to keep public spending stable. No, she tells me, it’s actually it’s worse than that: “They don’t take into account the £22bn black hole that we set out in the July statement… And of course that isn’t just for one year, because those pressures that built up are recurring.”
On asylum costs, on Ukraine, on the contaminated blood and Horizon compensation scandals – “both of which the previous government committed to, but not in any Budget did they ever commit the money to it” – she needs to find more; and “those things are in addition to what the IFS set out”.
So, I suggest, we are really talking about a £50bn gap? She does not demur. “There’s a big gap, and we’ll have to set it all out in the Budget. But I don’t think this comes as any surprise to the British people.”
Coming on to the consequences, she comes very close to confirming that National Insurance contributions for employers will go up. I point out that in the manifesto, she committed to not raising National Insurance, period. She replies: “for working people. I mean, our manifesto was really clear. It was: we will not increase taxes on working people, which means that National Insurance, the basic, higher and additional rates of income tax and VAT – and those commitments stand.”
It is clear that, in a grand sense, the Labour government is playing a giant game of chicken with big business. On the one hand, the lure of stability and certainty for major investment – and billions of pounds are pouring in, including from controversial companies like Australia’s Macquarie, every day. On the other hand, the improvement to workers’ conditions and a fairer taxation system you would expect from Labour. It’s a delicate business – extracting, as Louis XIV’s finance minister Jean-Baptiste Colbert said, the largest possible amount of feathers with the smallest possible amount of hissing.
We are talking before the row broke out between the government and Dubai-based company DP World, which owns P&O ferries – a company the Transport Secretary, Louis Haigh, had recently described as a “cowboy operator” – but the tension is everywhere clear. So far as Rachel Reeves is concerned, in the end, Labour must hold its nerve and the wealthiest must pay their fair share.
Ahead of the Budget on 30 October, she will not go through the list of taxes likely to rise. But asked about VAT on private school fees and a changed regime for so-called “non-doms” she does not flinch. These were not back-of-the-envelope calculations, the Chancellor said. If the Tories were going to vote against the VAT hike, they had to explain where the desperately needed teachers for state schools were going to come from.
I asked whether she wasn’t worried that the wealthy would simply flit away to Switzerland or Italy if the rules on non-domicile taxation were changed, as wealth managers have been busily warning ever since? “No, I’m confident. You know, the UK is an amazing country, where people want to be. And previously, when taxes on non-doms have been changed, you haven’t seen that flight. I think it’s a really important principle. If you make Britain your home, you should pay your taxes here; and under this government you will.
“It’s not right [that] ordinary working people are footing the bill for everything, whether it’s our defence, whether it’s the response to Covid, whether it is fixing our schools and our hospitals. Everyone’s got a responsibility, if you make Britain your home, to pay taxes here.” Reeves rejects the idea that someone who lives in the UK should be able to use their overseas connections to claim their domicile in another country for tax purposes. “It’s not [right] and we will change that, and we will have a modern system to replace it.”
Although we don’t go into capital gains tax – the final calculation is coming late, almost up to Budget day – her political thinking seems clear enough. As she did during the election campaign, Reeves rules out a wealth tax. She also insists that improving living standards for working people is a Budget priority: “Even in the really difficult circumstances that we face, we are going to do everything in our power to protect the living standards of working people.”
Something has to give. I point out that pensions are probably the biggest potential area for revenue-raising. She merely suggests, quite properly, that I wait for the Budget.
On the living standards pledge, reduced inflation and her commitments on the main taxes will be an enormous help. But thesecond Budget theme, says Reeves, is the NHS. “Of all the public services, that is the one where the decline and the problems are most visible. We’ve got to get those waiting lists down…
“We promised during the election campaign 40,000 extra appointments every single week in the NHS to clear that backlog. And I want people to feel within the first year of the Labour government that they are getting hospital treatment when they need it and those numbers – that 7.6 million – come down. That will be my priority in terms of the NHS in the Budget. It is inexcusable that people are waiting that long.”
Reeves’s third priority is investment and she talks about it with great passion and fluency, as she did in her conference speech in Liverpool. On the fiscal rules, it is clear her commitment is not to extend the time horizon for balancing the finances, but rather to reassess the national balance sheet to allow for more borrowing.
Following the former chief economist at the Bank of England Charles Bean, I suggest that this could allow her to raise an extra £50bn for long-term investment, but that but she would be unwise to go the whole way, given the uneasy mood of the bond markets. She appears to agree.
Although she says the “household/government analogy” does not usually work, she sounds like the social democratic Margaret Thatcher we have christened her (Reeves is known as the “Iron Chancellor”), as she explains her thinking: “If you buy a house, it is quite reasonable to get a mortgage, because you live in that house for a number of years; you pay that back over time. When you do your weekly shop or go on a summer holiday, you should not be borrowing and asking your children to pay for that holiday.
“But that’s what the previous government was doing… paying for day-to-day spending by borrowing – asking future generations. And the problem with that is that you’re never going to free up the money to invest in the capital that we need to grow our economy.”
Britain was in “a spiral of decline”, she argues, missing out on investment opportunities, unable to grow the economy and so having to watch public services decline: “You have to then increase taxes on a smaller and smaller base.” Reversing this maligned corkscrew was Labour’s great mission.
Enthusing about investment decisions already revealed – £8bn from Amazon Web Services; £10bn from Blackstone for Blyth in Northumberland for data centres; £21.7bn for carbon capture and storage – she announced “billions of pounds more of investment in the UK” at the investment summit on 14 October, bringing the total to £60bn.
She agrees that capital projects from government were essential alongside those. But when I ask about a possible return to HS2 between Birmingham and Manchester, I get a warning: “We can’t promise to do everything all at once. I’m an MP in Leeds. I would love to see Northern Powerhouse rail improvements to Trans-Pennine. But we’ve been in government for three months. We’re not, in the first Budget, going to be able to reverse everything or do everything we might want to do.
“It’s not an easy thing to say because we’ve waited 14 years to be at this point. We also do need a bit of patience… it’s going to take a decade to get Britain growing in the way that we want it to.”
To chart that course, Reeves is quietly refocusing the Treasury, from the bean-counting department towards being a growth ministry. Spencer Livermore, the first growth minister in the Treasury for many years, now attends all the Budget meetings. Reeves herself chairs the Growth Mission Board set up by Keir Starmer, because “unless we grow the economy, every Budget is going to become harder and harder”. Reeves concedes there has been “a bit of a shock to the system in the Treasury. But I also think it’s hugely welcome because they have been through, in the last 14 years, so many Budgets and so many fiscal events where each time the trade-offs were harder than the last, because we have failed to grow the economy.”
Of herself, she says, “I’m going to be the Chancellor that does things differently. We’re going to get to that growth, improve living standards and improve our public services.” Not a flicker of self-doubt. In a previous interview with Reeves in these pages, the New Statesman distinguished between Rachel One, cautious Rachel, and Rachel Two, radical Rachel. Which is it? Both, perhaps: “You’ve got to be credible.”
I come away feeling I’ve met a genuinely Labour Chancellor, a woman clear that she is in the Treasury to help ordinary people on ordinary budgets, prepared to take on powerful critics over tax rises, and with a real optimism about the room for growth and the future: “We’re going to make the long-term decisions to get our country back on its feet. And we will, in the years to come, feel the benefit of that. We need to make those long-term decisions now.”
This had been an early-morning interview, before which the key negotiation (for there is always a negotiation) had been the firm promise of pastries. Indeed, there they are, fragrant and glistening, on the table. But somehow, as the conversation goes on, the pastries are forgotten and at the end, as I turn round to reach for one, they have mysteriously disappeared. I’m fairly sure I saw an official covertly munching. The Treasury never truly changes. Your correspondent lopes sadly off to buy a late breakfast – one financed entirely from current revenue.
[See also: Wes Streeting: “I don’t want to be the fun police”]
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This article appears in the 16 Oct 2024 issue of the New Statesman, Make or Break