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It was a speech that Rachel Reeves never expected to make. Three weeks before her second Budget, the chancellor laid the groundwork for a second round of tax increases that would pile further pain on the UK public.
The speech so close to the Budget was highly unusual. But Reeves pledged after last year’s £40bn package to not come back with fresh demands for higher taxes. Reeves’ post-election fiscal event was supposed to be “one and done”, according to an ally.
It is now clear the chancellor is on the cusp of breaking that vow. With her Downing Street speech and press conference on Tuesday, timed to run live into breakfast broadcasts, Reeves set out in advance the political and economic justification for a brutal Budget on November 26.
The speech had three key goals. First, Reeves hinted heavily — without explicitly saying it — that income tax increases are on the table later this month, in a move that would be a blatant violation of one of the central planks of Labour’s manifesto for office in July 2024.
“All will have to contribute” to this effort to repair the public finances, she warned. “Everyone can see this year has thrown many more challenges our way,” she added.
People close to the decision-making process said the question inside the Treasury was whether to go for a big income tax rise or instead opt for what one called a “Swedish smorgasbord” of smaller tax rises to fill the fiscal void.
Torsten Bell, a Treasury minister who is helping to write the Budget, has Swedish heritage and has advocated a range of alternative tax raising measures — many of them first proposed while he was running the left-leaning Resolution Foundation think-tank.
The second was to reassure financial markets that her party will not succumb to any temptation to water down its fiscal rules, as she attempts to keep borrowing costs low and pave the way for fresh Bank of England interest rate reductions. The central bank’s next decision is on Thursday.
Reeves has so far opted for a tiny buffer of £9.9bn against her own fiscal rules. Now the chancellor said she would shift to build “more resilient public finances with the headroom to withstand global turbulence”. There were no major moves in gilts on Tuesday morning.
And third, it was a clear attempt to point the finger of blame for the dire economic and fiscal situation firmly at her Conservative predecessors, alongside global forces beyond her control. Higher borrowing costs were a legacy of Liz Truss’s ill-fated mini Budget, she repeatedly declared.
Poor productivity growth, weak public and private investment — these too were legacies of the previous Tory-led governments, she said, not the fault of Sir Keir Starmer’s Labour administration.
A productivity downgrade by the Office for Budget Responsibility sits at the heart of that unenviable fiscal situation, which Reeves painted as a backward-looking judgment on Conservative economic mismanagement.
She accused the Tories of “gutting” public services and severing vital investment needed to build the economy, compounding the damage with a “rushed and ill-conceived Brexit”.
“It is my job to deal with the world as we find it, not the world that I might wish it to be,” Reeves said.
The OBR’s trend productivity forecast is expected to be downgraded by about 0.3 percentage points, punching a massive hole in the government’s finances. Reeves ruled out sidelining the forecaster.
But it did not mean accepting a dim productivity outlook in the future, Reeves said, touting reforms such as overhauled planning rules and sticking with plans to bolster public investment.
“Forecasts are by their nature based on past data. I don’t believe the past is our destiny,” she said.
Some have questioned whether Reeves will still be around as chancellor to reap any of the longer term gains she insists will flow from a tough Budget: namely lower borrowing costs, more money for the NHS and the prospect of pre-election tax cuts.
The chancellor, asked whether her decisions would be politically disastrous for Labour, suggested she was prepared to take the risk. “We have got to do the right thing,” she said. “We can’t keep on racking up debt.”
In a speech shot through with attacks on the last government, Reeves decried politicians resorting to “short-term sticking plaster solutions, rather than making long-term economic plans”.
She could easily be blamed for similar sins. Labour came into office claiming that higher growth could fix the deep problems in the public finances and help fund improved public services, a claim that few economists believed was sustainable.
Reeves’ first Budget last October was the biggest tax-raising fiscal event in a generation. Yet she left herself only paper-thin fiscal buffers, leaving the Treasury badly exposed to increases in global interest rates.
An unexpected first fiscal correction ensued in March, and an even bigger one now lies ahead. The party tied its hands behind its back with manifesto pledges on income tax, VAT and national insurance, compounding the political price an already unpopular government is now set to pay.
In her speech, Reeves argued the UK’s current plight was a legacy of political “instability and indecision” under the Tories. Her critics will argue similar mistakes under Labour paved the way to this month’s painful Budget.
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