Rachel Reeves’ summer reading choice is Abundance, the zeitgeisty US bestseller by Ezra Klein and Derek Thompson. It’s a book that echoes one of the Chancellor’s favourite themes: that infrastructure investment – housing, clean energy, transport – is the route out of economic stagnation. But for now she must contend with the reality that it laments: the politics of scarcity.
That much is made clear by the new report from the National Institute of Economic and Social Research (NIESR), the thinktank founded by such luminaries as JM Keynes and William Beveridge almost a century ago. It estimates that Reeves will miss her main borrowing target by £41.2bn owing to weaker economic growth, higher debt interest payments and welfare U-turns. To eliminate this deficit and maintain “headroom” of around £9.9bn, Reeves will need to cut spending or raise taxes by £51.1bn at this autumn’s Budget.
Some will deem this forecast too pessimistic (City of London analysts project that Reeves’ shortfall will be closer to £20-25bn). But the report offers perhaps the clearest distillation of the Chancellor’s woes. Reeves, it warns, faces an “impossible trilemma”: she cannot “simultaneously meet her fiscal rules, fulfil spending commitments, and uphold manifesto promises to avoid tax rises for working people. At least one of these will need to be dropped”. Under this scenario – which many believe Reeves will face at some point – what would give?
Earlier this year, as Germany loosened its fiscal rules to fund higher defence spending, there were some, including within the cabinet, who argued that Reeves should do the same. But if this was ever plausible – and the Chancellor would remind colleagues that Germany’s debt is far lower than the UK’s – there are few who believe it is now.
Back in July, Britain’s borrowing costs spiked as Reeves’ tears led investors to conclude that she was about to be replaced as Chancellor (and that the fiscal rules would be loosened). This had two main consequences: Reeves’ position, ironically, became safer (“it was a reminder that she’s trusted by the markets,” says one aide) but her fiscal rules became even harder to change. Survival came at a price.
This leaves spending and tax. Reeves has little room for manoeuvre on the former: departmental budgets have been set for the next three years (and some, not least the Home Office, wanted more). Welfare cuts are off the table owing to the resistance of the Parliamentary Labour Party. As for politically radical choices such as abolishing the state pension triple lock, cabinet ministers warn that the government “lacks a democratic mandate” for those.
What is clear, whichever forecast you choose, is that tax will have to do the heavy lifting this autumn (as our cover – “Just raise tax!” – anticipated last month). True, as Reeves likes to point out, she raised tax by £41.5bn in her first Budget but years of austerity meant that didn’t go as far as it should have done.
NIESR argues that the Chancellor should raise income tax rates, precisely the option that she has consistently ruled out. While aides are striving to avoid playing “whack-a-mole” on tax, they insist that Reeves will abide by Labour’s manifesto commitments: not to raise income tax, VAT, National Insurance (on employees) and corporation tax. To this list you can add a general wealth tax of the kind advocated by Neil Kinnock – a levy of 2 per cent on assets worth more than £10m – which Reeves effectively ruled out during her appearance at the Edinburgh festival last weekend.
But a wealth tax isn’t the same as higher taxes on the wealthy. Capital gains, pension tax relief and the gambling industry (as advocated in Gordon Brown’s NS guest-edit) are all likely targets. There’s also renewed debate over higher council tax bands (an option Reeves supported as a backbencher in 2018). The question that will haunt the Chancellor between now and the Autumn Budget is whether this will be enough – and who the other losers might be.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: The problem with Robert Jenrick’s migrant sex crime claims]
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