It has been clear for months that taxes were likely to rise in the Budget this autumn. Rachel Reeves left herself so little margin for error in last year’s Budget that any bad fiscal news would mean that she would have to come back for more.
Almost from the moment the chancellor sat down after delivering last year’s speech, the bad fiscal news has come thick and fast. She sought to stay on track in March by announcing savings in welfare spending, but those have now been blocked by her own MPs. Before that, the prime minister announced a U-turn on means-testing the winter fuel payment, restoring it to most pensioners.
Meanwhile, the global economic outlook has worsened and tax revenues have fallen behind the forecast.
The question now is not whether she will have to raise taxes, but whether she can do so without breaking Labour’s manifesto promises not to raise any of the taxes that produce the bulk of the government’s revenue: income tax, national insurance and VAT.
Jim O’Neill, the former Conservative minister who advised Ms Reeves in opposition, tells The Independent today that, “without changing some of the big taxes”, the chancellor cannot make her sums add up. “The past few days should force government to truly prioritise,” he says, “and, crucially, recognise it can’t deliver on all three of its fiscal rules, growth mission and manifesto tax commitments. Something has to give.”
The Independent’s view is that we are not quite at that point yet. It may still be possible for Ms Reeves to raise the sums of money required without breaking into the “big three” taxes – or even into the fourth, corporation tax, which Labour has also promised not to raise.
But any prudent chancellor needs to be prepared for more news on the downside. She needs to take the British people into her confidence and explain that, painful as last year’s Budget was, it may be necessary to take further painful decisions this year.
If she does have to break manifesto promises – as opposed to merely bending them with sophistry about the incidence of taxation on “working people” with her increase in employers’ national insurance contributions – she needs to persuade people that the alternatives are worse.
She needs to explain that she cannot simply “relax the fiscal rules” and borrow more, as some of the voices from her own party seem to imagine. She did this rather well at a conference of CEOs last month: “Fine, we can change the fiscal rules to borrow more. What would happen? Gilt yields would go up more, so the cost of servicing the whole stock of debts goes up. The fiscal rules aren’t a construct that we’ve pulled out of thin air, they’re to meet the real constraints that exist – that if we want to borrow somebody has to be willing to buy those bonds.”
But she, the prime minister and whoever is the minister for the morning news round need to make this argument repeatedly.
Then she – and they – need to explain why it is so hard to cut public spending. Labour MPs may have been guilty of wishful thinking about the consequences, but they were not wrong to block the rushed and crude cuts to personal independence payments that Ms Reeves wanted. It has been reported that the chancellor, rather sulkily, wants the Labour rebels to take the blame for the tax rises that will follow: it would be better if she could set out a better path to welfare reform that might end up saving money rather than starting from the demand for cuts.
There are still many options for tax rises that do not touch manifesto promises. Ms Reeves could perhaps explain to some of her ill-informed backbench colleagues why a wealth tax is a bad idea that has been abandoned in every country that has tried it. She could go on to explain that there are other ideas that could achieve the same objective.
Angela Rayner, the deputy prime minister, helpfully set out a few small-ticket items in her memo in March. Beyond that, the freeze in income tax thresholds could be extended. Tax reliefs for pensions remain an unjustified benefit for the better-off. A mansion tax on properties worth more than £2m is long overdue.
Openness and transparency have never been the watchwords of the Treasury in tax policy. Chancellors have tended to hoard their power to surprise people with the big decisions at Budgets. But this chancellor and this government are in an unusually difficult situation.
Ms Reeves needs to explain the trade-offs behind the difficult decisions that she is about to make if she wants people to support them.
