This is the sequel that was never meant to be. Almost exactly a year ago, Rachel Reeves told the CBI that “she was not coming back with more borrowing or more taxes”. It was a desperate attempt to appease businesses aggrieved by the rise in National Insurance. But even at the time plenty in Labour questioned whether Reeves would be able to keep her word. She has not.
While rejecting the option of higher borrowing, the Chancellor’s second Budget will be defined by higher taxes. These, No 10 and No 11 declare with one voice, are essential to avoid “a return to austerity”. The late decision not to raise income tax has left Reeves reliant on a “smorgasbord” of revenue raisers.
Tax thresholds will be frozen for another two years (until 2030), a stealthy but valuable move that will raise around £8bn. A new property tax will be imposed on homes worth more than £2m through a revaluation of council tax bands F, G and H. “Everybody knows it doesn’t make sense that a terraced house in the north of England pays more council tax than a mansion in central London,” declares a Labour minister.
Other measures will include a reduction in the amount that can be saved in tax-free Isas from £20,000 to £12,000, a new levy on gambling firms (as long-demanded by Gordon Brown), a “tourism tax” on hotel stays and Airbnb-style rentals (a victory for local mayors), a “taxi tax” on private hire firms and a tougher sugar tax that will now cover bottled milkshakes and lattes.
Reeves intends to expand her narrow fiscal headroom of £9.9bn (bond vigilantes, as I reported back in July, would prefer something closer to £20bn) and to fund an array of spending commitments. These include the abolition of the two-child benefit cap to reduce child poverty, a cut in energy bills by moving some green levies into general taxation, another freeze in fuel duty and more money for Britain’s “national religion”: the NHS. Reeves, remember, also needs to fund the U-turns on winter fuel payments and welfare cuts, measures that still stood at her last fiscal event.
It’s a left turn and one that No 10 and No 11 are happy to identify as such. Labour MPs, who effectively helped write this Budget, will certainly like it. But others inside the party question whether voters and the markets will.
The former now favour spending cuts over tax rises and overwhelmingly support the two-child benefit cap (backed by 59 per cent). Confronted by headlines reporting that large families will receive £20,000 from its abolition, Reeves and Keir Starmer will need to do something they haven’t done often enough: leading and winning an argument.
As for the markets, they preferred Reeves’ draft Budget to the final version. When a rise in income tax appeared inevitable, UK bond yields fell to their lowest level since July and spiked after the Chancellor changed course.
Reeves will today insist that future tax increases and spending restraint mean the markets can trust her. But the danger is that they find her smorgasbord all too unappetising and demand a different menu. For a Chancellor who has made fiscal responsibility her defining commitment that’s a risky place to be. Sequels are often gorier than the original; Reeves will hope this one is an exception.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[Further reading: The Budget of last resort]
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