At the beginning of a crisis, actions always trail behind events. In autumn 2007, as the first bank run for 150 years began, Gordon Brown refused to nationalise Northern Rock (fearing it an “Old Labour” remedy). By the following year he had taken the commanding heights of the banking system into public ownership.
In early March 2020, as the worst pandemic for a century began, Boris Johnson declared that it was “business as usual” and reacted with libertarian incredulity to calls for a lockdown. A few weeks later he was amassing emergency powers and ordering the UK’s “free-born people” to stay home.
Even as a new world comes into being, politicians cling to the old one. They, like us, are creatures of habit who embrace change reluctantly.
So it is with Keir Starmer and Rachel Reeves. They acknowledge the world has changed – a global recession now looms – but there are still hard limits on their response.
At their press conference at Jaguar Land Rover on Monday, Starmer and Reeves insisted that much must remain the same. The Prime Minister affirmed Labour’s pledge not to raise income tax, VAT and National Insurance on employees. For No 10 and No 11, tax is a cost-of-living issue. Yes, the UK’s levels remain modest by European standards (the average worker is paying an effective rate of just 19 per cent on earnings). But as April’s ubiquitous price rises take hold, the government has no desire to stand accused of only adding to the squeeze.
Tax is also an issue of trust. One Treasury minister recalls David Cameron’s refusal to abandon his pledge to protect pensioner benefits. “I’m not having one of those bloody split-screen moments,” the prime minister told aides, referring to broadcasters’ habit of juxtaposing contradictory statements. Why will Labour’s pledge survive? Because it is a pledge, ministers insist.
To some ears, Starmer’s answer on fiscal rules appeared to offer more flexibility. It was wrong to suggest that “the first thing we’ll now do is put to one side our fiscal rules,” he said. Could it be the second or third thing? No 10 insists not. Reeves, certainly, is leaving no room for ambiguity. “All of the decisions that we make as a government will be underpinned by the stability of our non-negotiable fiscal rules,” she declared yesterday.
In short, the UK will weather the storm without raising any major taxes or borrowing much more. To an increasing number inside government, that position looks unsustainable.
Already anaemic growth forecasts for this year are being revised down. UK 30-year bond yields have reached their highest level since 1998 (5.5 per cent). Reeves’ budgetary headroom of £9.9bn (0.3 per cent) – restored only a fortnight ago – could soon be eliminated.
How will these contradictions be resolved? There is, it’s worth noting, an escape route available to the Chancellor. The Charter for Budget Responsibility allows the government to “temporarily suspend” its fiscal rules in “the event of an emergency, or a significant negative economic shock to the UK economy”. This would allow Reeves to acquire more borrowing firepower without having to formally rewrite her rules (as she did last autumn). The Chancellor would merely be required to present a plan to end “the temporary suspension”.
On tax, too, there are options short of raising the totemic levies frozen by Labour. Most now expect Reeves to extend the freeze in personal tax thresholds by a further two years (raising around £8bn). One Labour grandee suggests she “take an axe” to pension tax relief – a move that Reeves herself proposed in a 2016 letter to the Times. A cut in the top rate from 45p to 33p, as the then backbencher suggested, would raise billions.
But a deeper downturn could require more radical action. As one government source points out, in the face of crisis, both Brown and Rishi Sunak were forced to break their pledges – Brown raised the top rate of income tax from 40p to 50p and Sunak increased National Insurance by 1.25p. Others predict that Reeves will “come back for more” on welfare – noting that overall spending is still forecast to increase from £313bn to £373.4bn by the end of the parliament.
In some areas at least, action is racing to catch up with events. Witness the government’s willingness to nationalise the Chinese-owned British Steel to save the company’s blast furnaces in Scunthorpe. The UK’s “reset” with the EU is moving from warm words to hard policy as the world fractures into rival power blocs.
But as soon as next week, Starmer and Reeves’ press conference could resemble a snapshot from a different, more innocent era. For now, like the cartoon character Wile E Coyote, they are stranded in mid-air. The risk is that they soon fall to Earth.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Anas Sarwar: “Energy security is national security”]
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