The Fiscal Dilemma: A Shift in Tax Policy
Workers have been warned they still face big increases in the cash they hand to the government despite a significant change in plans regarding income tax. The Treasury has made it clear that the main rate will not be increased on November 26, despite weeks of heavy hints about the first rise for 50 years. This decision followed a gathering Labour revolt against breaking the election manifesto, with No10 starting to panic about Keir Starmer’s own survival. It caused chaos on markets, with investors pushing up the risk premium on UK debt.
Government sources insisted the change was because forecasts from the OBR watchdog were slightly less bleak than anticipated, with stronger wage revenues partly offsetting a productivity downgrade to leave a £20billion deterioration. However, this would still leave Ms Reeves needing to close a fiscal gap of up to £40billion on November 26, as she has committed to rebuilding ‘headroom’ that has been wiped out by backtracks on policies such as winter fuel and benefits cuts.
The Financial Times said she is now looking at cutting tax thresholds to drag millions of people deeper into the system. That would represent a huge expansion of the hated ‘stealth raid’ that has been in effect for years. Ms Reeves could then attempt to argue that the manifesto has been abided by – but critics would point out that ‘working people’ were suffering.
Treasury sources did not categorically deny the idea was on the table, acknowledging that she will still have to use ‘big levers’ to raise money, with ‘final decisions still to be taken’. Julian Jessop of the IEA think-tank suggested that significant reductions would be needed to raise the same amount as a 1p increase in the basic rate of tax – £8billion.
Labour insiders are in despair about shambolic briefing ahead of the critical package, with blame being cast on Treasury minister Torsten Bell and No10 chief of staff Morgan McSweeney. The Pound has taken a hit after the latest extraordinary U-turn emerged overnight. Interest rates on gilts – the main way the government borrows money – also spiked in early trading, although they eased back slightly after the Treasury issued a statement stressing the Chancellor’s determination to shore up the public finances.
Analysts warned that the UK could be facing a ‘credibility shock’ after the maelstrom of infighting and public contradictions. Even Labour’s favourite think-tank branded the situation ‘not normal’. Ms Reeves’ shift in approach appears to have coincided with panic in Downing Street over the threat to Sir Keir.
Only last week the Chancellor was delivering a highly unusual pre-Budget speech warning that ‘everyone’ will have to ‘contribute’ to shoring up the government’s books. She then stated publicly that cutting capital spending would be the only way to abide by the manifesto promises. That was universally seen as confirmation of broad-based tax increases.
Nigel Green, CEO of global financial advisory deVere Group, warned that ‘mixed signals’ were spooking the markets. ‘This is exactly how credibility shocks begin,’ he said. ‘Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising. There’s nothing investors hate more than indecision disguised as strategy.’
He added: ‘The reaction is unmistakable. Bond traders are telling the Treasury that they will not tolerate mixed signals. They saw what happened during the Truss turmoil and they’ll not wait politely for clarity. They’re pricing risk in real time.’
Even the Resolution Foundation think-tank, often favoured by Labour ministers, warned that the briefing risked damaging the country. Chief executive Ruth Curtice said: ‘It is normal for economic forecasts and policies to change in the run up to the Budget. It is not normal for so much of that to be laid bare in public. The market moves this morning and in recent weeks suggest a serious look should be taken at the approach to market-sensitive forecast information.’
One despairing government official told the Daily Mail of the turbulent Treasury process: ‘Ironic that this is the one where they introduced the idea of a Budget Board with Torsten in the chair to make the whole thing more orderly and consultative.’
The Economic Outlook and Market Reactions
Grim figures released on Tuesday also revealed that unemployment had hit the highest level in more than four years, potentially giving Ms Reeves more pause for thought. And there was more evidence of an economic slowdown yesterday, with GDP essentially flatlining in the third quarter.
Ms Reeves is expected to take what has been dubbed a ‘smorgasbord’ approach – tinkering around the edges of the tax code to milk more money from workers and the better-off. Such measures could include a new gambling levy and higher taxes on expensive properties, as well as per mile charges for EVs.
The Cabinet is said to be so deeply divided on what to do that Ms Reeves had written two Budgets, one openly breaking the manifesto and another skirting round the edges of it. A Treasury spokesman said: ‘We do not comment on speculation around changes to tax outside of fiscal events. The Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.’
Tory leader Kemi Badenoch said Ms Reeves ‘needs to abandon all plans to raise taxes’. Speaking on a visit to a generator hire firm in Writtle in Essex, Ms Badenoch said: ‘The problems we are having now were caused by her last budget. The last disastrous budget is creating a need for the new problems that she wants to create. What we’re asking her is to learn the lessons from that last budget and just stop the tax rises altogether.’
Earlier this month Ms Reeves was pictured leaving Downing Street with part of her diary visible, and the word ‘Thresholds’ to describe one meeting. There was already a widespread expectation that the Chancellor would extend the long-running freeze on personal tax thresholds, introduced under the Tories. Economists have warned that the number of those paying the 40p tax rate will top 10 million if that happens.
