Labour’s manifesto, like Schrödinger’s cat, is neither alive nor dead. At yesterday’s PMQs Keir Starmer confirmed what had become an open secret in Westminster: that the party is considering breaking its pledge not to raise income tax. Rather than insisting that “the manifesto stands”, as he had before, Starmer implored MPs to simply wait for the Budget.
Don’t expect a final decision to be made for a while – Rachel Reeves will receive the OBR’s first post-measures forecast on 10 November – but the case for action is clear. The Chancellor wants to do many things in her Budget: she wants to avoid a return to austerity (i.e. major spending cuts); she wants to keep her fiscal rules and satisfy the bond markets by increasing her “headroom” of £9.9bn; and she wants to fund the reform or outright abolition of the two-child benefit cap. She also has to contend with the OBR’s productivity downgrade and the cost of U-turns on winter fuel payments and welfare cuts.
This Budget is Reeves’ last big opportunity to raise significant sums before the next general election. By autumn 2026 Labour will have been in office for more than two years and memories of its economic inheritance will be even less fresh than they are today.
The Treasury is paying close attention to a proposal from the Resolution Foundation – Torsten Bell’s old stomping ground – to raise income tax by 2p while cutting National Insurance by the same amount. That move would help protect workers’ pay packets while raising £6bn from those who pay income tax but not employee NI such as pensioners, landlords and the self-employed (not groups, it’s worth noting, ever shy about defending their interests).
There’s one school of thought in Labour that says Reeves has little to lose from breaking the manifesto. The party has already exposed itself to that charge by increasing National Insurance on employers and, as they look anxiously at Labour’s poll ratings, some MPs ask whether things can really get worse.
But the politics of raising tax remain fraught. All of Labour’s opponents would have something distinctive to say: Reform will cry that it proves you simply can’t trust the old parties; the Conservatives will cite it as proof of economic mismanagement; and the Greens and Lib Dems (plus Andy Burnham) will ask why Reeves isn’t doing more to tax wealth. The Chancellor’s riposte is that she has done plenty of that already – raising taxes on non-doms, large farms, private schools and private jets – but the perception of inaction is a problem for Labour.
One former aide to Gordon Brown warns that raising income tax is “the right thing to do at the wrong time”, complaining of “precisely zero pitch-rolling to explain it”. And here’s the danger for Reeves: has she missed her moment? Some cabinet ministers favoured a move after Donald Trump’s inauguration when defence spending was raised and the global economy was roiled by tariffs. But that was the road not taken. Reeves can now only hope that the one she’s on leads somewhere better.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[Further reading: PMQs Review: Keir, they’re watching you]
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