In a pivotal pre-budget speech on November 4, Rachel Reeves, the Shadow Chancellor, outlined the stark choices facing her government as it prepares to address the UK’s economic challenges. The Office for Budget Responsibility (OBR) has today published its economic forecasts. Combined with a looming £21 billion gap in productivity, Reeves come under pressure to deliver cuts or increases to taxation and public spending.
The OBR’s announcement on October 31 sparked an unprecedented and vigorous civil war within Reeves’ party that has yet to play itself out. While some party members advocate for raising income tax—a move not seen in half a century—others urge maintaining existing tax pledges. As a former Treasury official, the Shadow Chancellor clearly understood the complexity of the situation. Rather than sweep these challenges under the rug like past administrations, I could stop spending money on building things and play with the numbers. Within a year—or worse, five years—we’d be in the exact same pickle again. Otherwise, productivity will continue to be challenged, growth will continue to be anemic, and national debt will continue to grow. So I’m being honest with people.
The government’s internal divisions have been hard to miss recently. During her appearance on BBC, Reeves expressed that adhering strictly to her manifesto commitments would necessitate significant cuts in capital expenditure. She noted, “It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.”
Given such dire fiscal implications, there are several possible avenues for filling in the expected budget gap. One simple tactic may be to make the tax threshold freeze permanent. This change would increase the number of people paying income tax by hundreds of thousands, as well as increase total tax revenue by an estimated £7.5 billion. An alternative still under consideration is increasing the income tax rate by two pence. Simultaneously, they pledge to reduce national insurance by two pence in order to raise roughly £6 billion.
Reeves has further indicated room for an override or at least stiff arming of her previous tax vows to meet changing economic circumstances. On Monday afternoon, she announced to the BBC that this was precisely what she was now seriously considering doing. She and her boss Labour leader Keir Starmer finally decided that this shouldn’t go forward at least not with an immediate income tax increase.
The Shadow Chancellor’s approach is a welcome shift that has received wary applause from most, both within her party and the larger political arena. One government official remarked on the complexities of raising income tax, stating, “There are good economic reasons not to raise income tax.” Meanwhile, a government insider commented on the internal dynamics: “This has been handled chaotically. We’ve got to the right place in the end.”
These challenges have not deterred Reeves, who is very much interested in getting the markets ready for an eventual tax swap. She’s toying with allowing rumors of an income tax increase to circulate. This kind of commitment would drive down government borrowing costs and better calibrate expectations on fiscal policy.