Political success depends on controlling the past as well as the future. The last Conservative government used “the mess” left by Labour to justify austerity from 2010 onwards. Margaret Thatcher and her allies repeatedly invoked memories of the “Winter of Discontent”; Tony Blair and Gordon Brown never allowed the Tories to forget “Black Wednesday” and the era of “boom and bust”.
In her statement to the House of Commons today, Rachel Reeves showed that she has learned from this tradition. Deploying authentic anger, she accused the Conservatives of a £22bn “cover-up”, casting the supposedly prudent Rishi Sunak and Jeremy Hunt as reckless profligates. “They exhausted the reserve. They put party before country. They continued to make unfunded commitment after unfunded commitment,” Reeves declared.
Labour’s talk of “black holes” has been greeted with much cynicism from left and right. Before the general election, Reeves herself told the Financial Times: “We’ve got the OBR now. We know things are in a pretty bad state. You don’t need to win an election to find that out.”
But while some of Labour’s incredulity is purely rhetorical, Reeves was able to cite genuine fiscal horrors: a £6.4bn overspend on asylum; a £1.6bn overspend on transport; a £9bn contingency “reserve” spent numerous times over. Even the impeccably sceptical Institute for Fiscal Studies concluded that “Reeves has grounds to be cross”. The Office for Budget Responsibility has announced a formal review into the preparation of its March forecast on the grounds that it may have been misled.
If the Chancellor’s first task was exposing the Tories’ recklessness, her second was warning of the pain that follows from it. In the event, Reeves went further than expected by announcing fresh austerity today. The Winter Fuel Allowance, a universal payment introduced by the last Labour government, will now be means-tested – only 1.5 million pensioners will now receive the benefit, down from 11.4 million at present.
The Chancellor also announced £3bn of departmental savings (notably to fund above-inflation pay rises for public sector workers), abandoned the planned cap on adult social care costs, paused the planned construction of 40 new hospitals and scrapped Sunak’s A-Levels replacement (the Advanced British Standard).
But this remained a mere hors d’oeuvre. The Budget on 30 October, Reeves signalled, would be the main course, warning of “difficult decisions to meet our fiscal rules across spending, welfare and tax”. Though she reaffirmed Labour’s commitment not to raise income tax, National Insurance and VAT, this leaves numerous avenues open: capital gains, council tax, inheritance tax and pension tax relief.
The Chancellor, who repeatedly declined to rule out additional tax rises during the election campaign, is now paving the way for them. This reflects two trends: first, the upwards trajectory of UK taxation (already due to reach a postwar high of 37.1 per cent of GDP). Higher debt interest, an ageing population, rising defence spending and a crumbling public realm are among the factors powering this shift.
But it bears remembering that the UK remains a low-tax country by European standards: the tax-to-GDP ratio is four percentage points higher in Germany and 11 points higher in France (and the UK’s has been inflated by low growth). With the exception of free-market economists, few voters worry about “the tax burden” in the abstract. Indeed, polls have long shown that improved public services are their priority.
The second trend is a history of post-election tax rises. Over the previous eight general elections, net tax rises have followed in all cases except for 2017, with an average increase of £21bn a year. There are natural political reasons for this. 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.
But how radical will Reeves be? The Chancellor’s “doctors’ mandate” – a term popularised by Labour prime minister Ramsay MacDonald – will never be as strong as it is today. After guiding MPs round the Treasury’s chamber of horrors this afternoon, Reeves would do well to take inspiration from Macbeth on tax rises: “If it were done when ’tis done, then ’twere well it were done quickly”.
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