Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Chancellor Rachel Reeves on Tuesday opened the door for a manifesto-breaking income tax rise, when she said the “national interest” would trump political expediency in this month’s Budget.
Reeves used a speech in Downing Street to warn the public and Labour MPs that she would use her Budget to tackle debt and that she was “determined to put the country on a more sustainable footing”.
Asked if she was prepared to break the manifesto promise not to raise income tax, even if that might cost Labour the next election, Reeves said: “We have got to do the right thing.”
She added: “If you’re asking what comes first, the national interest or political expediency, it’s the national interest every single time for me and it’s the same for Keir Starmer too.”
Labour officials insist no final decision has been taken to raise income tax and that Reeves is still weighing up whether a fiscal hole estimated at about £30bn can be filled without breaking a key manifesto promise.
But her unusual 8.15am speech, about three weeks before the Budget on November 26, was an attempt to prepare the ground for tough tax decisions to stabilise the public finances.
There was a muted reaction to Reeves’ speech in financial markets, with gilt prices falling slightly but remaining higher on the day. The pound was down 0.5 per cent against the US dollar at $1.307.
Reeves’ message was partly aimed at the public but also served as an economics lecture to Labour MPs, as she sought to explain why she needed to tame debt in order to cut government borrowing costs.
She said the aim was to free up money for key public services and ultimately tax cuts. Reeves noted that one pound in every 10 of taxpayers’ money was spent on servicing the UK’s debt.
“It’s important everyone, public and politicians, understand that,” she said.
One of Reeves’ fiscal rules requires her to have government debt falling year on year by the end of the decade, but in the near-term she is running a significant deficit.
The chancellor also warned Labour MPs who had resisted £5bn of welfare cuts that there was “nothing progressive” about a benefits system that left one in eight young people not in education or employment.
Reeves’ speech was also an attempt to blame the previous Conservative government for her predicament, as she confirmed that official forecasts would sharply downgrade estimates of Britain’s future productivity growth.
The chancellor said Tory austerity policies and Brexit were partly to blame, alongside cuts to public investment over the past decade. “I have to respond to the world as it is, not as I would want it to be,” she said.
Reeves said her Budget would reflect “Labour values” and that she rejected the deep spending cuts implied by “austerity” and would protect key public services including the NHS.
She also indicated that she would beef up her margin of error against meeting her fiscal rules, which include funding day-to-day spending — excluding investment — entirely with tax receipts by 2029-30.
Her refusal to countenance big spending cuts and her determination to strengthen her fiscal “headroom” against future global turbulence mean that she will turn largely to tax rises to fill the fiscal hole in her Budget.
The option of raising the basic, higher and additional income tax rates by 1p is favoured by some in the Treasury as the simplest way to raise more than £10bn, but it could come at a heavy political cost for Labour.
Some close to the decision-making process say Reeves and Prime Minister Sir Keir Starmer are still weighing up whether a series of smaller tax rises could be deployed instead to fill the fiscal void.
But Reeves’ speech was deliberately intended to keep open the option of a manifesto breach, and she repeatedly declined to rule out an income tax rise.
“If we are to build the future of Britain together, we will all have to contribute to that effort,” she said. “Each of us must do our bit.”
Reeves said she would be guided by the principle of “fairness” but accepted that excessive taxation of entrepreneurs and wealth creators could backfire. “We will seek to get that balance right,” she said.
Sir Mel Stride, Tory shadow chancellor, said: “Rachel Reeves has made an emergency speech because she is panicking about the speculation she has fuelled. But all she’s done is confirm the fears of households and businesses — that tax rises are coming.”
