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Sir Keir Starmer has raised the prospect of spending £2.5bn a year by axing the controversial two-child benefit cap, fuelling Conservative claims that his new Labour government is set for a “colossal U-turn” by raising taxes.
Starmer on Monday said he agreed with his education secretary Bridget Phillipson, who said ministers would consider lifting the cap “as one of a number of levers” in Labour’s strategy to reduce child poverty.
He added: “We will make sure that the strategy covers all the bases to drive down child poverty. No child should grow up in poverty.”
The comments came as Jeremy Hunt, former Tory chancellor, said Labour was paving the way for a tax-raising Autumn Budget by claiming its economic inheritance was worse than expected, with spending out of control.
Chancellor Rachel Reeves has claimed the Tories bequeathed her a mass of unfunded spending commitments. She will highlight this “spending inheritance” in a Treasury audit that is expected next Monday.
With Starmer now hinting the government could head off a revolt by Labour MPs by removing the child benefit cap, which was introduced by the Tories in 2017, pressure for higher taxes is mounting.
“She is softening us up for a colossal U-turn,” Hunt told MPs in a debate on the King’s Speech, insisting he had left Reeves with an economy that was well on the way to recovery.
The benefit cap stops most parents claiming additional child-related welfare payments if they have more than two children.
The Resolution Foundation has estimated removing the cap would cost £2.5bn a year, adding to growing pressure on Reeves. The chancellor has said she will not make unfunded spending commitments.
The chancellor could also face an additional bill of £7bn to £8bn annually if she decided to pay all public sector workers an inflation-busting 5.5 per cent pay rise — the proposal made by independent pay review bodies for 514,000 teachers in England and Wales and 1.36mn NHS workers.
Reeves is expected to respond to the proposals by all pay review bodies next week and has indicated she could meet the recommendations in full. She has said there would be “costs” of not doing so in terms of possible industrial action and problems in recruitment and retention.
The chancellor vowed before the election not to raise rates of income tax, VAT, national insurance and corporation tax, levies which account for about 75 per cent of all exchequer revenues.
Hunt warned Reeves might therefore raise taxes on business, including capital gains tax, which he said would hamper growth and ultimately feed through to voters.
Reeves’s Budget is not expected to take place until mid-October at the earliest. The chancellor will announce the date next week, but she is preparing the ground for a tough fiscal statement.
The “spending inheritance” audit is intended to highlight supposedly irresponsible Conservative plans and broken parts of the public sector, which Reeves will have to address.
Yvette Cooper, home secretary, on Monday gave a flavour of the exercise when she said the Rwanda deportation scheme, axed by Starmer, had already cost £700mn.
Cooper said it was the “most shocking waste of taxpayer money I have ever seen”. In the same vein, Reeves announced she was starting the process of appointing a “Covid Corruption Commissioner” to try to boost recoveries of money from Covid-19 pandemic contracts lost to fraud and waste.
Elsewhere the Labour government has had to deal with a prisons crisis, while Wes Streeting, health secretary, has claimed the NHS is “broken”. One Tory official admitted: “It is true — in some areas things are really bad and they couldn’t have known how bad when they were in opposition.”
Improved growth forecasts at the time of the Autumn Budget could soften the need for tax rises or spending cuts, and help Reeves stay within her fiscal rule that public debt will be falling in five years’ time.
But Treasury officials said they recognised that improvements to the economy from Labour’s pro-growth measures, such as on planning, could take time to feed through.
Reeves said of the Conservative government: “They stored up problems, failed to make the difficult decisions and then ran away, leaving us to pick up the pieces and clear up their mess.”
Hunt said the economy grew more quickly in May than economists expected and inflation was down to 2 per cent, adding Reeves was looking for excuses to introduce “tax rises she was planning all along”.