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Sometimes you just have to lean in. Britain’s Labour government has spent a lot of time trying to camouflage its essential character even from itself. Admirable talk of fiscal rules and the need to calm bond markets has been used to distract from a fundamental truth: this is a high-spending, high-taxing government.
The subterfuge has been so successful that Rachel Reeves is widely seen as an austerity chancellor, best known for snatching pensioner fuel payments and cutting welfare, even though she committed the UK to an extra £70bn per year of public spending and has raised taxes by £40bn. From an already high base, Labour is spending more, taxing more and borrowing more.
Last year, Team Reeves proclaimed her hefty tax rises to be a “one and done”. Now, faced with a large hole, it looks more like a two and through. Hemmed in by her fiscal rules and high debt interest payments, Reeves is unwilling to borrow more. With a party unwilling to countenance serious cuts to welfare spending — MPs are demanding at least one increase to reduce child poverty — the chancellor is publicly rolling the pitch for substantial tax rises in this month’s Budget.
The primary political focus is on whether she breaks Labour’s explicit manifesto pledge not to raise income tax, VAT or national insurance. While the economic argument for broad-based tax rises over other measures is sound, such a flagrant break risks grave political consequences. And for all her legitimate complaints about the mess she was left, Reeves is now the victim of Labour’s own deceit at the last election about the need for tax rises.
The decision to break that pledge — probably by an increase in income tax rates — is not settled. This could still be an oh-so-clever feint to lessen the political impact of other tax rises. But it does feel as if the government is steeling itself. Expectations are now being baked in.
Labour figures close to Reeves now support breaking the manifesto pledge both to fund the change agenda voters were promised and to give her more fiscal headroom against further shocks, easing market fears and possibly adding to downward pressure on interest rates.
Some favour a rise in income tax and corresponding cut in national insurance, so that the extra burden would fall on income from pensions, property and self-employment rather than salaried workers. Others say a rise in the basic rate of income tax, allied with other measures which target the wealthy, could be sold to voters if they saw improvements by the next election. Perhaps, though, this places an awful lot of unearned faith in the communication skills of Reeves and the prime minister.
But while this “will she, won’t she?” feels like the main political story, the bigger picture is that Reeves is reaching for the tax lever and yanking it hard. The growth she was counting on has not come. She is the “big tax-raising chancellor” she said she would not be.
This is a clear and central choice. One can disagree with it and wish for spending restraint instead. But it has a clarity Labour now needs to accept. One of the reasons the Starmer government looks so uncomfortable in its skin is because it is trying to seem more frugal than it either is or wishes to be.
Labour spent its first year trying to split the difference between competing priorities. The extra spending so far is both a lot and not enough. Defence and policing, social care and prisons all remain stretched. Moves to boost growth are undercut by other measures holding it back. Starmer has lost the country, wasted a year and squandered a huge parliamentary majority.
And the desire not to be painted as a high-spending government — the point of the tax pledge in the first place — owes much to the fact that Labour strategists are still chasing those Reform-minded red wall voters they targeted but in fact largely failed to win last time. Meanwhile Labour support is fracturing in part because of the government’s bleak message of spending restraint.
And there are political arguments for a shift in tone which sounds optimistic rather than apologetic about its spending. Both Reform and the Conservatives are making the case for large — almost certainly unachievable — cuts. Austerity versus spending is again a central divide and Labour has picked a side.
Politics demands conviction. It is best served with a bellow not a whimper and that applies especially to unpopular measures. Alas, neither Reeves nor Starmer really do rousing defiance.
So can a newly unapologetic higher-taxing strategy work politically for Labour? Maybe, if voters feel the cost of living has eased and public services visibly improve. But if it is funded through a clear breach of the manifesto, it is quite hard to see how Starmer could lead Labour into the next election, or Reeves still be there as chancellor, having so blatantly broken an explicit promise. Labour might need a new face or two if voters are to overlook such a flagrant breach of faith.
Whether or not Reeves breaks Labour’s tax promise, she may as well embrace what this Budget will tell us about the essential nature of her party. This is a government that taxes more, to spend on public services.
It cannot abandon all restraint, but Labour will function better if it accepts the political logic of its choices. In any case, this is now its only option.
robert.shrimsley@ft.com
