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1 November 2024

The black-hole blame game

Were Labour's tax rises planned all along, or did the Tories force its hand?

By Rachel Cunliffe

When Rachel Reeves met the New Statesman’s political editor Andrew Marr two weeks before the Budget, she told him of the fate that awaited her on her first weekend as Chancellor of the Exchequer.

According to Reeves, “it was an immediate crisis. And the previous government refused to face up to it”. Treasury officials told the new Chancellor, presumably sleep-deprived and still processing Labour’s election victory, that they need to issue another £22bn of government bonds this year to balance the books, which neither the markets nor the Office for Budget Responsibility were aware of.

It was a story Reeves returned to at the despatch box on Wednesday, warning that the government’s reserve had been spent “three times over” by July and promising to publish a Treasury breakdown “hundreds of unfunded pressures on the public finances”. She also quoted from an OBR report of the Spring Budget forecast, in which the organisation says it was not given full information by the last government and was unaware of “undisclosed spending pressures that have since come to light”. (The OBR has costed these at £9.5bn.) This, Reeves argued, was why it was so imperative for her to raise taxes by a historic £40bn.

Not everyone is buying it. In his response to the Budget, Rishi Sunak hit back at the Chancellor’s analysis, arguing “this is not her inheritance, these are her choices”. The message from the former prime minister was “We warned you” – that Labour had always planned these sorts of tax rises but “were not telling the truth” during the election campaign. The reply of the former chancellor, Jeremy Hunt, to the OBR’s report is that it was “impossible to know” if and how the overspend would have been compensated by savings had the Conservatives remained in power, while the general Tory reaction has been to pour scorn on the £22bn figure and claim Labour was always going to be looking for an excuse to raise taxes as soon as the election was done and dusted. Indeed, my colleague George Eaton was one of several commentators predicting before the election that Reeves would conveniently discover “the books are worse than thought” once she entered the Treasury.

The reason George and others were confident this would happen was that the figures very obviously did not add up. Hunt’s 2024 Spring Budget presented the public with 2p cut of National Insurance on the basis of spending review figures that were, as OBR chair Richard Hughes put it, not such much “a work of fiction… given that someone has bothered to write a work of fiction, whereas the government have not even bothered to write down their departmental spending plans underpinning their plans for public services”. But the Tories persisted with the myth that the 2p NI cut could be funded without decimating already collapsing public services all the way through the election and Labour, not wanting to drop the precious Ming vase, went along with it, knowing they’d have one hell of a challenge once they won the election.

That said, this would have been considered a medium-term problem – Labour couldn’t have known that the Treasury reserve had already been spent three times over, presenting an immediate crisis over the summer. So two things can be true: Labour did always suspect that tax rises of some kind, beyond the VAT on private school fees and scrapping the non-dom tax status, would be necessary even if they pretended others… and Reeves was still stunned when confronted with the scale and urgency of the immediate challenge, which was a genuine shock.

Politically, this is a comms issue – how convincingly can Labour sell the “it’s not us, gov, it’s the inheritance” line. (If the focus group of swing voters I observed in Sittingbourne is anything to go by, that’ll be a challenge – one woman was sure Labour “must have known what was going on” in opposition.)

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But it also goes some way to explaining one of the strange things about this Budget: £40bn in extra taxes, £100bn more in borrowing… and for what? Yes, the NHS is getting a big cash injection (although already there are warnings it won’t be nearly enough), and yes, there is finally going to be some decent investment in schools. But there was no blockbuster settlement on one of the most pressing issues of our time, social care, which kicks an already expensive can further down the road and leaves the health service and cash-strapped local councils scrambling to pick up the pieces. And no eye-catching infrastructure pledges – the best we got was the HS2 might finally make it to Euston.

And that’s without noting that the spending is front-loaded, meaning unprotected departments like Justice (which is facing a prisons overcrowding crisis and a scandalous courts backlog) will face a £9bn shortfall this parliament, according to the Institute for Fiscal Studies.

Speaking of the IFS, its outgoing director Paul Johnson (interviewed by George this week, in case you missed it) called Labour’s fiscal plans “light fiction rather than science fiction”. In other words, they’re not as wildly fantastical as the numbers the Tories were trying to present with a straight face, but there is lots there to be doubtful about.

Overall, it’s hard to avoid the sense that Labour is running – or, rather, taxing – to stand still. The UK’s sclerotic growth and the challenges of an ageing population all parties refuse to confront (over 12 per cent of government spending goes towards pensions – equal to defence, transport and policing combined), plus the bill from Covid, really have created a black hole. The Conservatives knew this when they cut National Insurance by 2p. Labour knew it too when it committed to upholding that cut. Neither were honest about it pre-election, knowing voters struggling with the cost-of-living crisis and broken public services don’t feel like the record levels of tax are getting them value for money right now, in part because so many of the government’s biggest liabilities are invisible. Labour no doubt thought it could sort it out later. But then things turned out to be even more dire than they realised.

It seems highly likely Reeves wasn’t planning to tax quite so much, and had hoped to have a lot more to show for it. The question is whether the measures she announced on Wednesday amount to much more than a £40bn sticking plaster.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here

[See also: Labour’s rhetorical black hole]

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