It’s Budget day in Westminster. The question being asked by Labour MPs: can Rachel Reeves pull it off? This lunchtime, the Chancellor will stand at the despatch box and pitch Labour’s first Budget for 14 years as necessary tough choices to ‘fix the foundations’ while also ensuring ‘working people don’t face higher taxes in their payslips’ (see Mr Steerpike for who Labour’s working people definition misses out). Reeves will use a report by the Office for Budget Responsibility to argue that the Tories left such a bad economic inheritance she had to take action. The Tories will try to argue in turn that Labour planned a tax raid (to the tune of £35 billion) all along and can be accused of breaching manifesto pledges.
Yes, Starmer has a large majority but he’s already had party management problems
A multitude of measures have been trailed or leaked in recent weeks. The latest include plans to raise the UK’s national minimum wage is to rise by 6.7 per cent next year. Reeves’s Budget will include some spending cuts, many tax rises and new borrowing. Internally, there are seen to be three key tests that will decide whether the Budget stays in tact or unravels in the coming days.
The first is the markets – and whether they will react well to the Chancellor’s decision to borrow more. Reeves has confirmed that she will change the fiscal rules to allow for higher borrowing (up to £50 billion) to invest in infrastructure. She will pitch this as a positive story of the Budget: ‘The only way to drive economic growth is to invest, invest, invest. There are no shortcuts. To deliver that investment we must restore economic stability.’ But with the bond markets jittery, all eyes will be on what guardrails she sets and what parameters will be in place to decide how that headroom is used. Reeves could also signal that she does not plan to borrow the full amount available – and suggest a figure closer to £25 billion. One of the reasons the markets want to see checks in place is that while Reeves has a reputation for fiscal responsibility, her eventual successor may not.
Second, business. Reeves’s plan to raise the national living wage has won compliments from some in her party. But for businesses, it’s leading to concern that this Budget will see greater strain and pressure put on already struggling firms. Reeves is expected to raise employer National Insurance – insisting that this does now break the party’s manifesto pledge. While voters will be the judge of that, the worry is that small businesses could struggle with the extra costs. Even the larger firms are sounding alarm. In a rare intervention ahead of the Budget, the Marks and Spencers CEO Stuart Machin has warned in a Times op-ed that by raising taxes Reeves would be taking the easy way out and not fixing Britain’s problems. While some Labour MPs see the Budget as a much-needed course corrective to transfer wealth and power to workers, a business backlash could hamper Reeves’s long-term growth prospects.
Third, Labour MPs. Yes, Starmer has a large majority but he’s already had party management problems just a few months after the election victory. Can Reeves keep the parliamentary party on side? Here the biggest concern among party whips is not the planned tax rises but spending cuts and a lack of funding. Already some cabinet ministers have seen red over proposed departmental spending cuts. Many Labour MPs have been working on the assumption that Reeves would lift the two-child benefit cap and find more money to alleviate the cut to the winter fuel payment. If she doesn’t, Reeves and Starmer will need to keep concerned MPs on side.
Finally, there is the verdict of the voters. However, in government this Budget was always seen as an opportunity to take some difficult decisions early, well away from the next election. It follows that this is viewed as an event to get through rather than one likely to enhance the party’s electoral fortunes in the short term. The hope is to blame the tricky choices on the Tories and come out fairly unscathed. A wide backlash from the public, however, would be problematic and make Reeves’s task of keeping her party on side even harder.
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