There were no civil servants present when ministers gathered for their weekly cabinet meeting on Tuesday. The reason? It was time to talk politics. On the eve of Labour’s first Budget for 14 years, Keir Starmer tried to rally his ministers around a common message: blame the Tories! He spoke of the so-called fiscal black hole bequeathed to Labour before he handed things over to his Chancellor to explain why difficult decisions were required on spending, tax and welfare.
Plenty of Labour MPs and aides question the wisdom of an election campaign which has boxed them in
For all the attempts to unite against a common enemy, just a glance around the cabinet table was a reminder of the unease about the decisions taken this week. Ministers such as Angela Rayner, Louise Haigh, Steve Reed and Shabana Mahmood have already expressed their objections to real-term departmental cuts.
Reeves sat opposite Starmer at the end of the table. Within her line of sight was Darren Jones, the chief secretary to the Treasury. Reeves and Jones are the guardians of fiscal responsibility – and are fast becoming the least popular members of the cabinet with colleagues. ‘Their standing is pretty low at the moment,’ says a government source after weeks of spending negotiations.
Reeves’s first Budget is seen as evidence of the Treasury’s dominance of the government’s agenda. Jones (who has referred to his three children as ‘cost units’) likes to say his buzzwords are ‘reform’ and ‘growth’, but these days his colleagues mainly associate him with the word ‘no’. Backing them is Reeves’s closest cabinet ally Pat McFadden, Chancellor of the Duchy of Lancaster, along with Wes Streeting, the Health Secretary, who was one of the few winners from the Budget.
These divisions within government could define the next year, especially after the comprehensive spending review which is due in the spring. There’s already talk of a January reshuffle, and a lot will depend upon how the Budget lands in the coming weeks. ‘We won’t really know for a week or so whether it’s OK,’ says a government aide. A Budget that survives contact with reality would cement the Treasury’s authority. One that unravels would embolden Reeves’s critics.
Starmer and Reeves always planned to use the first Budget to make tough decisions in the hope of getting them out of the way before the next election. Their view is that it is OK, for now, to be unpopular. ‘We have five years,’ says a senior government figure.
But others in the party are less relaxed about Starmer’s plummeting approval ratings – the sharpest drop of any prime minister in more than 40 years. ‘If it is still this way in the new year, people will panic,’ admits a government aide. The government’s missteps in its first few months means it had less political capital to spend on Budget day than anyone expected. While ministers point to funding for the NHS to the tune of £22.6 billion and a £2.9bn boost to defence as news they can sell on the doorstep, there’s plenty of other things that Labour MPs will be less keen to talk about.
Reeves has had to balance the needs of three groups: the markets, MPs and voters. Pleasing one lot risks upsetting another. For example, the decision to relax the fiscal rules to allow for greater infrastructure spending has led to a nervousness in the City – the UK’s long-term borrowing costs hit a post-election high just before the Budget. The market response on Wednesday after Reeves had spoken was cautious – with 10-year-gilts surging to 4.39 by the end of the day.
She also risks a fight with the parliamentary party over her decisions to press ahead with the winter fuel payment cut and to maintain the two-child benefit cap. ‘How many Labour MPs will threaten to vote against this?’ asked a worried government aide. The Chancellor hopes to win round disappointed MPs by pointing to the quiet radicalism of the Budget which in the words of one MP represents a ‘generational transfer of wealth and power to workers’.
Despite suggesting for most of the election campaign that there would be no need for tax rises, Reeves has presided over one of the biggest tax-raising events ever, to the tune of £40 billion. The decision to hike employer national insurance could be read as a manifesto breach – but the bigger concern may be whether these measures are good for workers in the long term with the OBR suggesting they could lead to a reduced work force. Businesses see it as part of a series of measures that will hurt the country’s competitiveness. The combination of an increase in employers’ NI, new labour laws and a big hike in the minimum wage is a triple whammy for business.
For the Tories, the tax rises present a big political opportunity to paint Labour as untrustworthy. Starmer and Reeves claim they went into the election with no plans to raise taxes, yet their manifesto was so carefully worded that they have plenty of room to tinker, such as with increasing capital gains tax and adjusting inheritance tax relief.
While the Budget can fairly be branded high tax, high borrowing and high spend, some in the party still worry there is not enough cash to go around. While the NHS is receiving a large boost and there is more money to go on infrastructure, day-to-day spending will rise to just 1.5 per cent per year from 1 per cent under the Conservatives. This is seen by some ministers – particularly those in the unprotected departments – as too close for comfort. Much of the additional spending Reeves announced is for this year with some for next – leading the IFS’s Paul Johnson to suggest the current spending estimates for after then is set to grow ‘implausibly slowly’ – raising the prospect of further tax rises if growth does not improve.
Privately, there are plenty of Labour MPs and aides who in hindsight question the wisdom of an election campaign which has boxed them in. The party promised a triple lock tax pledge on income tax, national insurance and VAT. At the time, there was little dissent. But as ministers are finding that their spending requests are being rejected, some wonder whether it is possible to avoid breaking the manifesto pledges for the rest of the parliament. When they go cap in hand to see Jones, he repeatedly brings up the manifesto tax promises. ‘So much of the counter pitch is: “We made tax pledges, so we are stuck with them,”’ says one figure privy to the conversations.
In the Treasury, there’s a concern that there is a failure to clock the fact that funds are limited. When Jones talks about tax promises, they think he’s imposing imaginary constraints. It was telling that Bridget Phillipson, the Education Secretary, would not confirm in an interview whether the tax pledge would remain until the next election. Reeves also wouldn’t rule out further tax rises in her post-Budget interviews.
The hope in government is that improved growth forecasts and falling interest rates, combined with Reeves’s tax raid, will allow for more spending in the coming years. However, the OBR’s revised growth forecasts are hardly encouraging. Despite the government repeatedly suggesting its number one priority is growth, there it little evidence that this budget will deliver it.
Already ministers are looking ahead to the spending review for better news. The change to borrowing rules on infrastructure also creates an opportunity to spend more freely. However, Jones – who is head of both the spending review and the infrastructure committee – is still reluctant to splurge, especially while the markets are nervous.
What this means is that there is a need for the party to unify and look as though it can make tough choices. The question is whether MPs have the stomach for it. Or as one unconvinced minister puts it: ‘A lot of us are wondering if this is really what 14 years in opposition was all for.’
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