Denis Healey, a Labour chancellor, advised that when in a hole, one should stop digging. The failure to observe this iron law of politics is behind the sense of constant crisis engulfing Rachel Reeves. The current chancellor’s problem is one of her own making. She designed her fiscal rules with so little wriggle room that even small changes in economic forecasts – such as revisions to GDP – mean that her numbers stop adding up. That, in turn, starts chatter about budgetary “holes” and the need for tax rises and spending cuts – despite no change in the economy.
In politics, as in digging, it helps to know when to put down the spade. Ms Reeves could end this drama by relaxing her fiscal rules. Or better still, replacing them, as the economist Tim Leunig suggested, with a 250-word summary of Britain’s economic position at the budget, and the effect of the government’s proposals. Instead, she has framed her decision to break an election promise not to raise income tax as unavoidable. She told BBC radio: “It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.” But this is not true. She’s blaming her rules for cuts they don’t require.
Labour’s fiscal rules were changed last October to allow full-throated public investment. There is no trade-off between tax rises and capital spending. Ms Reeves’s income tax hikes reassure markets – but she has better news for voters on spending. She wants to use £3bn of the extra tax revenue to fully reverse the two-child benefit cap. This would be the right thing to do – lifting about 350,000 children out of poverty. But more needs to be done. With unemployment rising and investment weak, the UK is running below capacity. If households, firms and exporters won’t step up, the state must – or the economy will stagnate.
No chancellor has raised the basic rate of income tax since Healey in 1975. The reason is obvious: about two-thirds of Britons would oppose income tax hikes. Raising income tax is risky – people see it in their pay packets, unlike VAT rises or threshold tweaks. However, research by Persuasion UK shows that the electoral penalty for raising income tax or national insurance is smaller than that for failing on public services, energy bills and child poverty. This, Persuasion UK says, is especially true with Labour 2024 voters as rebuilding the public realm was key to the party’s electoral mandate. What is required is a positive argument, not a defensive one. The smartest strategy is to refocus on the cost of living – for example, by spending tax receipts to lower energy bills – while stressing fairness: everyone chips in, but the richest most of all.
Even better, Britain should look at its history and invite investors to swap short-term gilts for longer-dated bonds at modest fixed rates. A voluntary conversion would be attractive when interest rates are falling. Ms Reeves could argue that this is not a sleight of hand but responsible stewardship of the public balance sheet. In 1932, the then chancellor Neville Chamberlain pulled off a similar feat: cutting debt costs by 0.6% of GDP and bolstering spending by the equivalent of £17bn a year today. That would be enough to deliver on public services in the long term and give something back to voters in the short term. Healey’s advice still stands: stop digging holes and start laying the foundation for a different politics.
