The extraordinary events of the last week have exposed a government not in charge of its own communications. This is not a good place to be.
If No 10 advisers briefing the media that Wes Streeting was planning a leadership challenge to the Prime Minister wasn’t extraordinary enough, the subsequent leak from the Treasury that the Chancellor had abandoned her plan to raise income tax was utterly baffling. Since the government has not announced an enquiry to uncover which civil servant was responsible, one must assume it came from one of the Chancellor’s own aides. That makes it more astonishing still.
Everyone knows that Rachel Reeves is in a fiscal hole. She has to find £20-30 billion in order to balance the books with enough ‘headroom’ to avoid another year of endless speculation about tax rises and the bond markets. But as a previous Labour Chancellor, Denis Healey, famously advised, when you’re in a hole, the first thing you should do is stop digging. Reeves still seems to be wielding her spade.
Given the fiscal circumstances, it was not unreasonable for the Chancellor and Prime Minister to consider breaking the manifesto promise not to raise income tax rates. Income tax is the largest single source of tax revenue (raising approximately £305bn last year, just over a quarter of all government receipts), and it is much the most progressive: that is, it extracts proportionately much more money from the rich than from the poor. A 2p rise in the basic rate of income tax would raise around £16bn per annum.
It was also entirely reasonable for them to decide that breaking the manifesto promise was too politically risky, and so to abandon the income tax proposal. It was even reasonable for Reeves to trail in her pre-Budget speech last month that she was likely to raise income tax: that could either have been a helpful ‘softening up’ for such a decision, or a clever ruse to fool people that she was going to do it, only to triumphantly declare at the end of her Budget speech that she had solved the fiscal problem while adhering to her manifesto promises. (Cue wild cheering from the Labour benches and Kemi Badenoch looking panic-stricken.)
What was not sensible – indeed, was downright damaging, as the subsequent hike in bond yields showed – was for the Treasury to reveal that Reeves had planned to raise income tax, but had now decided to perform a U-turn on the U-turn. What should have happened – what would have happened under any previous Chancellor, Labour or Tory – was that both of Reeves’ possible Budget plans, one with an income tax rise, one without – should have been given to the Office for Budget Responsibility to analyse at the same time, and neither of them should have been revealed to the media.
At this point let’s fish a couple of red herrings out of the sea. Some people are saying that Labour should never have boxed itself in by promising not to raise income tax (or National Insurance and VAT). Indeed: it would have been better if we were not starting from here. But we are.
Some economists on the left are also calling for Reeves to abandon her fiscal rules, to allow herself to borrow more, rather than raise taxes. There is a good case for changing the current rules or even moving to a different system of guardrails altogether. But the Chancellor should not do this now. This is both because there is no point in a Chancellor announcing new fiscal rules (as Reeves did last year) if they then change them at the first sign of trouble; and because more borrowing is not the answer at this point. With the interest rate (yield) on new borrowing over 4.5% for ten-year gilts, the government is already paying over 8% of its total budget on debt interest, about the same as defence and transport combined and nearly as much as on education. Since the shortfall in the public finances is on current not capital expenditure, borrowing more to pay for it would break the ‘golden rule’, that governments should only borrow for investment, and add to these costs.
So since cutting public expenditure is rightly also off the table (on the contrary, everyone expects Reeves and Starmer to succumb to party pressure to remove the two-child benefit cap, at a cost of around £3.6bn a year), there is no alternative to tax rises. The question is, which ones?
The received wisdom among most economic and some political commentators – all people who never have to stand for election – is that Reeves should indeed raise income tax, and is wrong to abandon that plan. They are now deriding the alternative option, which Reeves has apparently plumped for, as a ‘smorgasbord’ of small, fiddly tax increases which will annoy and anger multiple groups of people and businesses, and probably backfire like George Osborne’s ‘pasty tax’ in 2012.
I disagree. If, as now seems likely after the latest revisions to the forecasts, Reeves has to find about £20-£25bn, she can do that with a few medium-sized tax increases, all of which would be progressive. There are several options. Freezing income tax thresholds (which somehow isn’t counted politically as raising income tax) would yield around £7.5bn a year. Applying National Insurance to investment income (such as landlords’ rental income) could bring in around £10bn. Reforming capital gains tax and equalising it with income tax rates could also raise around £10bn. Increasing Council Tax for expensive homes (or adding new bands) could yield £4bn. In addition, Reeves could follow Gordon Brown’s urging and raise gambling taxes to bring in another £3bn. She has already made clear (against Ed Miliband’s net zero advice, we may assume) that she is planning a new tax on power used by electric vehicles, which depending on its rate might yield around £2bn.
It is easy to imagine a Budget speech which includes measures of these kinds. The Chancellor would explain that the revision to the UK’s productivity forecasts after the economic failures of the Tory years, the impact of Brexit, and global economic uncertainty have all combined to make the UK’s fiscal position worse today than a year ago. Since Labour is committed to improving public services and the fiscal rules are sacrosanct (one of these the measure of Labour’s commitment to the public’s priorities, the other the symbol of its fiscal responsibility), that unfortunately means taxes are going to rise.
But Labour understands the pressures ordinary people are under from the cost of living crisis. It is committed to fairness. So only those with the broadest shoulders will have to pay more in tax. The richest people in our society have enjoying rising levels of wealth over the last two decades largely unrelated to their own efforts. So Labour is going to ask them to contribute a small proportion of that additional wealth to the common good. Labour said in its manifesto that it would not raise taxes on working people- and Labour sticks to its manifesto promises!
One would think that a communications message of this kind should not be too difficult to sell come November 26.
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Michael Jacobs is Professor of Political Economy at the University of Sheffield. He is a former General Secretary of the Fabian Society (1997-2003) and member of the Council of Economic Advisers at the Treasury (2004-07). He was Special Adviser to Gordon Brown at 10 Downing St from 2007-10. His books include The Green Economy: Environment, Sustainable Development and the Politics of the Future (1991), Paying for Progress: A New Politics of Tax for Public Spending (2000) and Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth (ed, with Mariana Mazzucato. 2016).
All blog posts represent the views of the author alone and not necessarily those of Mainstream.
