A week ago, Rachel Reeves rose to deliver her Spring Statement, an event likened by some to an “emergency” or “mini” Budget. Yet now, as one minister put it to me, “Trump has wiped out everything.” The UK and the world have entered a new economic era – and Reeves’ statement already feels outdated.
For Labour, there is much to fear. As the Office for Budget Responsibility’s head, Richard Hughes, told MPs yesterday, the “very volatile and uncertain” global environment means its growth forecasts already look too optimistic. The 25 per cent US tariff on car imports alone, the IPPR estimates, threatens 25,000 jobs. Even if the UK eventually secures an exemption from tariffs – perhaps through a tax sweetener for Big Tech – a global trade war will still likely depress growth.
The politics is as grim as the economics. No 10 strategists continue to regard the cost of living as the defining domestic issue for Labour. But the upwards pressure is relentless: rents up 8.3 per cent, council tax up 4.99 per cent, energy bills up 6.4 per cent and water bills up 26 per cent (the largest increase since privatisation in 1989). Though real wages have now risen for the last two years – by 2.2 per cent in the most recent quarter – the typical household will still be worse off this year.
It’s become fashionable to liken Rachel Reeves to George Osborne as she cuts welfare benefits and threatens unprotected Whitehall departments. But the differences are as important as the similarities. First, Reeves’ Autumn Budget was highly expansionary – it gave far more in public spending (an annual rise of £70bn) than it took away in taxes (£41.5bn). Even smaller future increases will take place from a higher baseline than the Conservatives would have adopted (the question is whether this will prove enough).
Second, Osborne, to his delight, was able to combine fiscal conservatism with “monetary activism” – quantitative easing and ultra-low interest rates (0.5 per cent). The former helped reduce the cost of government, the latter dramatically reduced the cost of household debt. As a consequence, homeowners’ living standards were cushioned throughout the Tory austerity years (a key reason why, sometimes to commentators’ disbelief, they kept winning elections).
Reeves enjoys no such luxury. The Bank of England’s base rate remains 4.5 per cent – homeowners as well as renters are being squeezed. And that’s unlikely to change soon – inflation is forecast to rise to 3.7 per cent this summer. Lower growth and higher prices conjure a familiar spectre – that of “stagflation”, the term coined by the former Tory chancellor Iain Macleod in 1965 (and now enjoying an afterlife in Trump’s America).
Faced with all this, the insistent question posed to Reeves is whether she will raise taxes at her next Budget. From one perspective, she has much room to do so. After years of Conservative tax cuts, the average British worker pays a lower rate on their earnings (19 per cent) than their US counterpart (23 per cent).
But tax, No 10 and the Treasury insist, must be viewed as a cost-of-living question. Reeves’ pledge to freeze income tax, VAT and National Insurance (for employees) is derided by economists. But abandoning it would expose Labour to two lethal charges – that its promises are worthless and that it has increased the cost of living.
Voters – as is common under Labour governments – are already becoming more favourable towards spending cuts and more hostile to tax rises (the reverse dynamic applies under Tory administrations). Here is one reason Reeves has prioritised cuts over tax increases.
This, some warn, threatens a new era of austerity. But faced with a choice between reducing the cost of living or improving public services, the risk for Labour is that it struggles to deliver either.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: What are schools for?]
Listen to the New Statesman podcast
Content from our partners
Related
