Rachel Reeves draws line under tax rises, but will Labour’s other pledges survive?

Good morning. Rachel Reeves’ speech to an audience of business leaders was partly a defiant defence of her tax-raising Budget, partly a promise that she wouldn’t do anything like it again. Some thoughts on why I have mixed feelings about that below.

I give it a year

Rachel Reeves used her speech to the CBI to do two things: to defend her Budget and the hefty tax rises it levied upon British businesses, and to say that it would be the last Budget of its kind.

In a way, a good thing: my concern is that the Labour government has gone to the limits of what it can usefully raise through further taxes on business. And perhaps, in fact, already too far. Not least when you add indirect additional costs thanks to the increasing minimum wage, and the government’s looming package of changes to the UK labour market. To make matters worse, the Budget didn’t include announcements on tax reform or anything really in the way of pro-business measures. This was a mistake.

I know I say this a lot, but it is important and it bears repeating: one big policy risk Labour took before the election was in ruling out quite so many of the usual tax-raising levers such as income tax. That has meant raising money to keep its promises on public services and to meet British voters’ expectations through taxes that run the risk of doing real economic harm.

In a striking recognition, though, that the money does have to come from somewhere, Kemi Badenoch has not committed to reversing Reeves’ tax increase. This is politically quite brave given that the default setting of the Tory party of late has been to call for tax relief first and ask questions later.

Labour took another big policy risk before the election. Not only did ruling out those taxes mean having to opt for suboptimal tax rises, it is far from clear that Reeves has raised enough to turn around the UK’s ailing public services by the time of the next election, let alone if she needs to bolster Treasury coffers in the event of any global economic shocks.

Speaking of global economic shocks: Donald Trump announced on his Truth Social platform that on his first day in office he would impose heavy tariffs on imports from Canada, Mexico and China. Whitehall officials in the UK regularly cite the Canadian government — a closely entwined ally — as having been the model of how to play the Trump relationship, because of how the Canadian diplomatic service managed and reduced the risks around renegotiating the US-Canada trade deal. That 25 per cent tariff on Canada is not a great sign for the UK’s hopes of avoiding the same.

Reeves is right to say “this far, no further” when it comes to future taxes on businesses. But it is hard to see, frankly, how anyone but the most Panglossian of Trump watcher might think that the UK can avoid spending more on defence and perhaps more on other things too as a result of his presidency.

The Labour government’s promises on income tax and national insurance always looked like stupid and risky pledges. Ministers may well need to start preparing the ground for having to break those pledges next year. They will need to find a balance between rightly reassuring businesses that there won’t be a repeat of the last Budget for them while preparing households for a Budget that they may find as unpalatable as corporate leaders did this one.

Now try this

With thanks to Robin Lustig for the recommendation: this week I listened to nothing but Tina Carr’s marvellous record Songs for Curly while writing my column.

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