Rachel Reeves has been urged by one of her former advisers to abandon Labour’s commitment to the state pension triple lock, warning that the pledge is “bonkers” and risks hobbling the government’s ability to manage the economy.
Jim O’Neill, a former Treasury minister who quit the Conservatives and later advised Ms Reeves, warned the chancellor had “hemmed herself in” with unsustainable manifesto commitments ahead of Wednesday’s spring statement.
His comments come as senior economists and Labour figures warn that the government has “boxed itself in” with pledges not to raise major taxes or break the triple lock – which guarantees the state pension will rise by 2.5 per cent, average earnings, or inflation, whichever is highest.
The intervention will add pressure on Ms Reeves as she prepares to outline the government’s plans amid a worsening economic outlook.
Government borrowing rose above forecasts last month, while the Office for Budget Responsibility is expected to halve productivity estimates. Growth projections have already been downgraded since the autumn Budget.
Ms Reeves is expected to pursue budget squeezes, including a £5bn saving from benefits, amid fears she may resort to austerity-style cuts reminiscent of George Osborne in 2010.
On Saturday, Ms Reeves warned that Labour could not “tax and spend our way to higher living standards and better public services. That’s not available in the world we live in today,” in an interview with the BBC.
Only health, schools and defence are set to be protected from further pressure.
Despite the fiscal constraints, there is no appetite in No 10 or the Treasury to raise income tax, VAT or national insurance – taxes Labour promised not to touch in its election campaign. The government has also ruled out increasing corporation tax or freezing income tax thresholds further.
Lord O’Neill said: “They have hemmed themselves in because of the manifesto commitments and compounded that by announcing such large increases in areas such as health and school buildings the first time around.”
The economist said Labour had initially “suffered from a lack of confidence and unfamiliarity with being in office” but was now “starting to tackle some sacred cows”, citing Sir Keir Starmer and Wes Streeting’s decision to scrap NHS England.
He added: “They already busted a manifesto commitment by cutting international aid, so why would that not open the door to breaking other manifesto pledges?
“To really give them the scope for a lot of the things they want to do on current spending, and not get into the Tory game of constant cutting at the margins, they are going to have to deal with serious income taxes or break the triple lock.
“Keeping the triple lock is just bonkers – at least they could means-test it.”
He also suggested that adjusting tax thresholds was an obvious route to increase revenue: “I would have thought the usual game of playing around with tax thresholds was an obvious candidate. I would have thought that would be obvious and it would not surprise me. Why would they not?”
Meanwhile, former Labour health secretary David Blunkett has called on Ms Reeves to “loosen a little” the government’s self-imposed fiscal rules.
Speaking to The Week in Westminster on BBC Radio 4, he said: “This is Treasury orthodoxy and monetarism at its worst … I would raise the self-imposed rule by at least £10-15bn and spend a great chunk of it on what we did back in ’97 with the new deal for the unemployed.”
Ben Caswell, senior economist at the National Institute of Economic and Social Research, said Ms Reeves may need to “get creative” with her fiscal strategy – suggesting she could emulate Germany by shifting defence spending off the books and excluding it from fiscal rules.
He said: “If you start investing in new factories to build munitions and tanks, that wouldn’t actually affect our fiscal space because it’s investment capital expenditure.”
However, a source close to the chancellor rejected the idea: “First, we changed the fiscal rules last year to unlock £100bn of capital spending. Second, we’ve already announced how we’ll meet the 2.5 per cent defence target by 2027. And third, if we did what Germany did, borrowing costs would have gone up by £4bn a year – that’s the size of the prisons budget.”
Mr Caswell warned that the current restraints leave Ms Reeves with “no fiscal headroom”.
Chaitanya Kumar, head of economic and environmental policy at the New Economics Foundation, also warned against basing policy on long-term forecasts.
“Basing deep welfare cuts on OBR forecasts of a fiscal rule breach five years from now is like demolishing your house today because a weather app has predicted a storm in 2030,” he said. “Forecasts are not facts – they shift with economic winds.
“Yet the government is treating them as gospel to justify benefits cuts that will hit the most vulnerable. Instead of planning for an economy that works for people, the chancellor is bowing to speculative projections and rigid fiscal rules that do more harm than good.”
