Rachel Reeves banks on big Budget wheeze to reconcile Labour’s pledges

Good morning. My thanks to Georgina, Simeon, Sam, Jen and Jim for minding the shop while I was on holiday. I had a lovely time in my own company pottering around my own city. (My advice: don’t bother with the British Museum’s Silk Roads exhibition. Go to the Sir John Soane Museum instead.)

The biggest event in the life of this young government is next week at the Budget on October 30. Some thoughts on a scoop from my colleagues below.

It’s a drag

The most important policy choice made by any British politician in this parliament was ultimately made in the last one: when the Labour leadership decided that they were better off matching the Conservative party’s commitment to not raise income tax, value added tax or national insurance.

The calculation they made was that it would be harder to get into office with a clear tax policy difference between them and the Conservatives, than it would be to stay in government navigating that constraint.

No one was ever told how things would have turned out: on the one hand, you can look at how large the Labour majority was and go “well, they probably could have got away without that one”. On the other, given that the Labour party did not get all that many votes you can go “well, it was actually an intensely shallowly won majority, so they probably needed every vote they could get”.

As I’ve written before, I think both the Conservatives and Labour would have been better off just fronting up the actual political and policy choices they were going to have to make, but I am beginning to bore myself on that topic so I am going to restrict myself to saying “well, I wouldn’t have started from here” to, ooh, once a fortnight.

In the here and now, the two most important pledges in the minds of the party’s voters, according to Labour’s own focus groups, are to turn around the NHS and that pledge not to increase taxes. Focus groups are not infallible but given they will ultimately shape the Labour’s political choices, they might as well be.

Of course, those two pledges cannot be reconciled. So the government will hope that when Rachel Reeves avoids raising rates of income tax, national insurance and value added tax, but increases tax in all sorts of other ways and uses that revenue to increase public spending, particularly on the NHS, it’ll be thanked for it. One way that Reeves will try to bridge that gap, George Parker and Sam Fleming reveal, is by prolonging the freeze on personal tax thresholds.

It means that between them, the governments of Rishi Sunak and Keir Starmer will have pulled an awful lot of middle earners into the higher rate of tax. As it stands, thanks to Sunak, income above £50,270 is taxed at 40p to the pound: which is very far from the type of earner that the higher rate was designed for.

It seems to me that there are three important reasons to have different rates of income tax, in no particular order: a) raising revenue, b) making your tax system more progressive, and c) encouraging people to earn more.

An unnoticed achievement/demerit (delete according to your preference) of the Conservative governments since 2010 is that the UK tax system is far more “progressive”: the highest earners pay for a lot more of it and many more low earners pay less. But it has scored less well on a) and in my view on c), though some of the changes Hunt made in his last Budget did helpfully remove some of the disincentives his predecessors had erected.

One reason for that is although making your tax system more “progressive” is always popular, in different ways a) and c) are politically difficult. A continuing freeze on thresholds does, at least, broaden the tax base by increasing the proportion of people who actually pay income tax.

This is a wheeze with a happy recent history for Labour, in that fiscal drag occurred under Tony Blair and Gordon Brown when Labour came into office, after the party similarly promised not to increase income tax and Labour was re-elected in a landslide. But it is also a wheeze with an unhappy recent political history, in that it is one of the main revenue-raising levers pulled by Rishi Sunak and Jeremy Hunt during Sunak’s premiership, and the Tories . . . weren’t.

Now try this

I also very much enjoyed my usual morning with the FT Weekend, particularly as I was in it this weekend: I did the lunch with the FT, with the historian David Olusoga.

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