How is Rachel Reeves really going to balance Labour’s books?

After Wednesday’s spring statement posed more questions than it answered, Sean O’Grady looks for answers to some of the most pressing

One promise that the chancellor, Rachel Reeves, has kept is that there would be no tax changes in her spring statement, with all the action centred on those cuts in public services. She said last year that she wanted to have only one major “fiscal event” per annum, ie the autumn Budget, and that any updates on the economy to accompany the Office for Budget Responsibility’s economic and fiscal outlook publications in the spring would be minor affairs.

Of course, the welfare reforms made it a bigger deal, but that was about it. Promise kept. However, the spring statement has posed as many questions about future plans as it has answered...

Why didn’t Reeves put taxes up rather than cut spending?

One is a degree of stubbornness, or pride, and a determination on the chancellor’s part not to give the Conservatives and her media critics an easy win when they taunted her about having to implement “an emergency Budget”, or “mini-Budget” (recalling grim memories of Liz Truss). That would look weak and chaotic, and she wasn’t having that.

The second reason is that taxes, at least as a proportion of national income, are running at a post-war high, and pushing them up again would be deeply unpopular. Reeves has let it be known that she won’t repeat last October’s bold tax-raising measures, at least on that sort of scale. She is also constrained by the manifesto pledges on rates of income tax, VAT and (employee) national insurance.

So why would she raise taxes again?

Only because she might have to, and that can’t be ruled out. In the October Budget and again in the spring statement, she has left herself very little in the way of a buffer if things go wrong, such as a global trade war that would hurt British exports and wipe out economic growth and expected increases in tax revenues. The £9.9bn of “headroom” on a public sector that’s spending £1,200bn a year is clearly risky. That’s why the experts think she’ll move on taxation again in the autumn, albeit maybe not as drastically as last year.

Couldn’t she just cut public spending again?

Yes, but a Labour chancellor will find it progressively more difficult to do so, with resistance growing in cabinet and the parliamentary Labour Party, as well as the unions and the membership. There may also be nothing left to cut in areas such as local government – councils will just go bust instead.

Most cuts to the public sector necessarily hit the poorest hardest, hence the worries about tax going up again. As Paul Johnson, director of the Institute for Fiscal Studies, puts it: “We can surely now expect 6 or 7 months of speculation about what taxes might or might not be increased in the autumn. There is a cost, both economic and political, to that uncertainty. The government will suffer the political cost. We will suffer the economic cost.”

Is there a political cost?

Yes. It is going to be rough for Labour for at least another year, and they may expect losses in local elections and by-elections (including the Runcorn one on 1 May). The polls will make for uncomfortable reading, especially for the chancellor, acting as the principal lightning conductor for her party.

Which taxes will be going up?

Anything apart from the manifesto holy trinity of income tax, VAT and national insurance. This week, for example, sees significant increases in vehicle excise duty, or road tax, and council tax on second homes. There will be a repeat of the speculation last year about the many areas Reeves could turn her attention to in order to raise revenues, including:

• Tax-free cash withdrawals from pension pots
• Higher-rate tax relief on pension contributions
• Taxes on dividends
• Capital gains tax
• Widening capital gains tax to unrealised gains in inherited property
• Duties on online gambling
• Digital services tax (but constrained by the likelihood of retaliation by Trump)
• Widening VAT, for example to books or children’s clothes
• Ending green tax breaks, eg on solar panels
• Reducing tax breaks on ISAs
• Taxing large lifetime gifts
• Inheritance tax on trusts
• Reducing the interest the Bank of England pays on commercial deposits
• Coercing pension funds into paying for infrastructure schemes

What she won’t do is introduce a wealth tax, as has been proposed by some on the left. She probably won’t relax the non-dom regime. She might, given public opinion, ease her plans to reduce inheritance tax relief on farms, the so-called tractor tax.

Has Reeves had it?

She is terribly poor at presentation, albeit not as gratuitously offensive as two of her ministerial colleagues in the Treasury, Darren “pocket money for the disabled” Jones and Torsten “I’ve got a mortgage” Bell. The recent business about pop concert tickets hasn’t helped her image, either. Her basic failings as a politician should be reason enough to replace her with a more persuasive performer, such as Wes Streeting, but the challenges and the policies would be precisely the same.

As always, when a chancellor is moved or sacked after following government policy, the prime minister is also damaged, and has to answer the tricky question: “If the chancellor has gone, why are you still here?” This is what happened when Liz Truss jettisoned Kwasi Kwarteng (2022), John Major lost Norman Lamont (1993) and Harold Wilson reshuffled Jim Callaghan (1967). None of these sackings (or resignations) did the PM any good in the end.

Keir Starmer and Reeves are in this together, and it would do the government more harm than good, both economically and politically, to provoke a crisis at this early stage in the life of the administration. Better to let Reeves take the heat and then move her, say, to the Foreign Office when things stabilise as a reward for her iron determination to save the economy, that sort of thing.

It’s quite conceivable, though, that to demonstrate stability of purpose, and because she’s proved resilient, she’ll be retained until the election, as was Denis Healey in the 1974-79 Labour government. But she will have to give up the pop concerts.