Rachel Reeves lacks the mandate for “tough” spending cuts and could be forced to break the promises she made to the public on tax rises, Downing Street veterans from previous Budgets have warned.
The clock is ticking for the Government to demonstrate positive change in terms of public sector performance, such as the NHS – with a lot of expectation surrounding the upcoming Budget.
And advisors who worked on the Coalition Budget of 2010, delivered by then Chancellor George Osborne and marking the start of the period of post-financial crash austerity, say Reeves has penned herself in by not being explicit about tax rises and some spending cuts in the Labour manifesto.
The government has promised public service reform – but Reeves and Prime Minister Sir Keir Starmer ruled out tax rises “on working people” during the election campaign.
As a result they could be forced to rely on stealth taxes – such as freezing income tax thresholds – or putting the onus on businesses.
Rupert Harrison, who worked with Osborne from 2006 to 2016, said Labour risked appearing duplicitous by promising not to raise so many lucrative taxes when it is clear money needs to be generated from somewhere in the short term.
He told i the first Budget after a change in governing party was the moment for a new administration to “set the tone” and get difficult decisions out of the way.
As with the Coalition government in 2010 Labour now has the “political capital” to make tough choices that may not be popular, he said.
But Reeves could find herself accused of breaking pledges in order to generate the amount of money needed to fulfil her spending commitments, he warned. Harrison argues this perceived lack of mandate for unpopular decisions is the key difference between Reeves now and Osborne in 2010.
Reeves ‘lacks mandate’ for spending cuts
“The Labour Party was extremely risk averse in their campaign – particularly ruling out the three tax rises [income tax, national insurance and VAT],” he said. “But as far as I can see, all of their ambitions require them to raise money to spend on public services. And they have limited the room they have to manoeuvre.
“Neither Gordon Brown in 1997 or George Osborne in 2010 pinned themselves down on tax in the same way. The difference is mandate. The Coalition government had a serious mandate from voters to make difficult decisions.”
Harrison says that Labour will be under pressure to demonstrate tangible improvement in public services, like healthcare, by the end of this parliament. This requires significant spending which, in the short term at least, must be generated through tax rises or borrowing.
“NHS waiting lists will be a test – if they can go into the next election saying waiting lists are down then it will be positive for them,” he said. “But to do that they need to put meaningful amounts of money in and that includes raising taxes which will come at a cost in terms of broken pledges and promises.”
Harrison added: “You are traditionally better off defending one big tax rise than lots of little ones which is why employer national insurance contributions (NIC) is probably going to be the one to go for”.
The Government has hinted the Chancellor will hike employer NIC to fund some spending. But, while some departments will see a rise in funding, real terms cuts are still on the cards for others.
Sean Kemp, now a partner at public affairs company Hanbury, was a No10 advisor for the Liberal Democrats when they were in the Coalition. He said there were similarities with now and 2010 due to the “tough stuff” the Government would have to announce but said there had not been enough pitch-rolling for spending cuts.
‘Public needed more warning about tough decisions ahead’
“Have Labour been able to really get across to people how tough it is and what might be coming?” he said. “I think they have done a bit of that but I am not sure if everyone is totally on board with the idea. They weren’t saying in the election they will have to cut spending.”
In 2010, the Coalition had addressed the economic crisis in the election campaign and made a case for what the remedies would be, Kemp argued. “You can disagree with what they were but you could not say the government had not set out where it was coming from and why it was doing what it was doing,” he said.
Kemp said Reeves, and Treasury officials, would be struggling to find any further savings to be made. This, he said, had been exemplified by the fact the Chancellor was forced to take the unpopular decision to means test winter fuel payments for pensioners.
“I find it very hard to see what else can be cut,” Kemp said. “The stuff still there now has been kept through austerity for a reason because they are effective policy or because cutting them would be a political hurdle that is too high.
“If you are going to make cuts you have to make political decisions about saying ‘we are going to do this, this is who we are’. It’s not easy to go and find another few hundred million to save. We don’t have discussions about how much we should spend so we end up in a situation where areas of spending have been cut almost to crisis point, such as in local government.”
Kemp argued Reeves could find herself in trouble if she decides to generate Treasury income by keeping income tax thresholds frozen. This will see an increasing number of people dragged into paying higher taxes, a process known as fiscal drag.
“At some point people are going to turn around and contest the fact they are paying higher taxes. I would be nervous about doing that again,” he said.
“I suspect they know roughly what the pain is going to be and they want to demonstrate spending and growth. If you are banking that people are not going to be better off you better make sure things are working properly,” he added.
‘Don’t go for quick wins’
Meanwhile an advisor from Labour’s Blair-era expects Reeves to be “cautious” and “predictable” to avoid economic shocks but says she must avoid the temptation to reach for quick wins – as he suggests former Chancellors have done.
Former No10 advisor Theo Bertram – now the director of the Social Market Foundation think tank – worked in Downing Street under both Tony Blair and Gordon Brown from 2006 to 2010.
“My advice would be to avoid the short-term populism that has characterised recent budgets and to make a virtue of doing the harder things that pay out over the long term,” he told i.
“I’d also be saying that less emphasis needs to go on what was left broken by the Tories, and more emphasis on what Labour is going to do to fix things.
“She also needs to convey a message of reassurance: ‘Yes things are in a bad state, but it’s ok, we got this’.”
Bertram said he was not expecting big surprises from the Chancellor.
“I think there is less tumult about this budget than many commentators suggest,” he said. “The political narrative at the election was all about getting growth and delivering a decade of renewal and what I expect to see in the Budget is a similar story of investing in the long term.”
