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What will a U-turn on taxes do to public trust?
The dreaded Budget is coming on November 26. Can Rachel Reeves survive if she breaks Labour’s central manifesto pledge and raises income tax? What would such a breach of faith do to Labour’s already battered reputation with the electorate, and to trust in politicians? - Toby Helm
The Labour Party manifesto - its pledge to the British people before the general election last summer - announced the following: “The Conservatives have raised the tax burden to a 70-year-high. We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.”
In a BBC interview the Shadow Chancellor Rachel Reeves in May last year doubled down saying she hoped, in fact, to lower taxes. She also promised there would not be big spending cuts across the board under a Labour government. “What I want and Keir wants is taxes on working people to be lower, and we certainly won’t be increasing income tax or national insurance if we win at the election.” She added: “There’s not going to be a return to austerity under a Labour government… in the end, we have to grow the economy. We have to turn around this dire economic performance.”
Many of the country’s most respected economists were disbelieving. The Tories had indeed left the economy in a terrible state. But Labour, they argued, was being dishonest if it led voters to believe it could put things right and return the country to growth and prosperity without first taking difficult decisions to restore the public finances to health by raising taxes or cutting spending, or both.
Paul Johnson, then director of the Institute for Fiscal Studies (IFS), and now the Provost of Queen’s College, Oxford, incurred the wrath of the Labour hierarchy by daring to pour cold water on the economic manifestos of the main parties. Johnson said both Conservatives and Labour were joining “a conspiracy of silence” by “not acknowledging the scale of the choices and trade-offs that will face us after the election”. He added that the next parliament could “well prove to be the most difficult of any in 80 years for a chancellor wanting to bring debt down.”
With Budget speculation swirling, I spoke to Johnson this week and he recalled his views being strongly rejected by Starmer in media interviews. “He just disagreed totally and said a Labour government would simply pull the growth lever and everything would be fine.” Johnson added: “Anyone with a pair of eyes could see this was a big problem.”
At the time of her first Budget as Chancellor - in which Reeves raised National Insurance on employers - Johnson had already felt vindicated. But it was clear to him that she had still not entirely learned her lesson, even then, when she insisted she would definitely not be coming back again in this parliament to announce still more tax increases. “She decided to make (another) promise,” Johnson said, “to take a punt but the punt has not paid off”.
On Tuesday morning at 8am, when Reeves made a pre-Budget speech in Downing Street and answered media questions, the penny seemed at last to have dropped. She would indeed, it seems, be coming back for more. More vindication for the economists. Her speech was about hard choices she now faced. It was a softening up exercise ahead of a likely U-turn on income tax, necessary to ensure she keeps within her fiscal rules on spending and borrowing. Asked if she was preparing to break Labour’s manifesto pledge, even if it meant the party losing the next election, she said: “We have got to do the right thing.” She added that “political expediency” would give way to the national interest.
It is possible that Reeves’s speech was a ploy, aimed at leading everyone to fear the worst, allowing her then to deliver good news on Budget day by saying that she will not, despite speculation, raise income tax after all? The nation would then breathe a sigh of relief and the clouds would lift over her and Labour. That it was such a ruse looks unlikely but not impossible. Downing Street and the Treasury are still saying that no final decisions have been made on tax rises, so as of now we know nothing for certain.
But assuming that Reeves does, after seeing the light, take the gigantic gamble of raising income tax to help plug a £30 billion hole in the public finances and reassure the bond markets, how will this play out politically? What will it do to trust in this government, and to faith in politicians to honour what they said they would do when they asked for people’s votes? Indeed, can Rachel Reeves survive as Chancellor and Labour still win a second term? The Times columnist Daniel Finkelstein wrote on Wednesday that Reeves would have no option but to resign if she broke the manifesto pledge. “She would have no credibility, and a government that kept her in post would have no credibility either.”
These are indeed big and dangerous moments for Reeves, Starmer and for Labour. If income tax is slammed up, it may well be the right move economically, the only responsible way to keep the public finances under control and keep the bond markets from reacting adversely, which, if they did, would put up the cost of government borrowing still further. Labour could conceivably earn voters’ respect for doing the difficult thing. For this to work, the gamble would have to pay off pretty fast, and the economy improve rapidly.
More likely it would be politically fatal. If taxes are raised Starmer and Reeves will effectively be admitting that they got it wrong before the election and will be asking voters to accept that economists such as Johnson were right. U-turns on tax and spending would normally only be foisted on the voting public, and be acceptable to it, if the economy had been thrown terribly off course by an unexpected disaster such as the outbreak of war, a global financial disaster, or a pandemic. Labour insiders cite a number of factors combining, that have forced them to act - but none amount to a major shock of this kind. They include the need to raise defence spending as a result of Donald Trump’s insistence that NATO members share the burden more with the US, a U-turn on welfare forced on them by Labour MPs that has cost billions, the results of Trump’s trade war (though they also, paradoxically, make out that the UK got a great deal from Trump on tariffs). And then they have recently begun citing consequences of Brexit despite the fact that they never mentioned it pre-election or immediately after, because they did not want to rile those who voted for it. Instead they pretended it was not an issue until they needed to.
Wielding excuses is not, however, likely to counter the loss of trust. Reform UK and its leader Nigel Farage - the last person who should be running the country’s economy after being instrumental in the disaster of Brexit - will make hay. In recent days Farage, reading the runes, has repositioned his party on economic policy saying a Reform government will not be able to lower taxes quickly. Fiscally responsible Farage is the new brand out there on sale. He has a new weapon at a time when polling for his party spells ever greater danger for Labour. After a tax raising Budget, Farage of all people will no doubt campaign on trust, trust, trust.
It is hard to see how this coming Budget can stem the fall in Labour’s standing in the polls and hold back Reform, at least in the short to medium term. A recent YouGov poll showed three quarters of Britons (74-77%) are already saying they have little to no trust in the party on the cost of living, immigration, taxation, managing the economy, representing people like them, or keeping its promises. In all six cases, only between 15-19% of the public say they have at least a fair amount of trust in Labour.
If those figures worsen, post-Budget, many more questions will be asked not only about Reeves’s future but also Starmer’s. A key test for the Chancellor and her party will be next May’s local elections. A bloodbath for Labour then and it could be too late for both of them.
Toby Helm is the former Political Editor of the Observer.
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