Giving in to the Labour left would do even more harm to the economy than Rachel Reeves is managing
Keir Starmer can’t sack Chancellor Rachel Reeves (Image: Getty)
Keir Starmer doesn’t dare to sack Rachel Reeves – even though she could bring the whole government down. And that may be a good thing. Because hard as it is to believe, if the Chancellor goes then her replacement, perhaps Pensions Minister Torsten Bell, could be even worse.
Ms Reeves has made it clear she plans to increase “personal taxation”, almost certainly income tax, in her Budget on November 26. But Labour MPs are worried. They fear that voters will never forgive Labour if it breaks the promise made in last year’s general election not to increase income tax, VAT or National Insurance.
Lucy Powell, Labour’s new Deputy Leader, made her concerns clear when asked about tax rises. She said: “We should be following through on our manifesto, of course. There’s no question about that.” She added: “Trust in politics is a key part of that because if we’re to take the country with us then they’ve got to trust us and that’s really important too.”
And Sir Keir’s MPs are anxious about reports that the Chancellor could deliberately target pensioners, by using an accounting trick designed to force the elderly to pay off the nation’s huge debts. Ms Reeves is considering increasing income tax but cutting National Insurance by the same amount – so that working people end up paying the same amount of tax, more or less, while pensioners and the self-employed pay more.
But last time she targeted pensioners, by limiting winter fuel payments, she was forced into an embarrassing u-turn. It turns out that there are formidable campaign groups sticking up for the nation’s older citizens, and Labour MPs aren’t keen to take them on again.
Why is there so much Budget speculation? It’s because the Treasury is leaking like a sieve, and that’s because Ms Reeves wants to prepare the financial markets for what’s to come. She doesn’t want traders panicking when data is published alongside her Budget, showing that productivity is lower than expected.
Many of Sir Keir’s MPs are scared. There was another poll this week that put Labour in fourth place – behind Reform, the Greens and the Conservatives.
The Prime Minister, however, is in a bind. When the Chancellor was seen crying in the House of Commons earlier this year, there were rumours that the pair had been involved in an argument – and that Sir Keir may even have threatened to sack her.
Markets responded badly. The pound fell and borrowing costs rose.
It also made the Prime Minister look like a bully. So he moved quickly, giving Ms Reeves a very public hug the next day and declaring that her job was safe.
As a result, he’s stuck with her, for the foreseeable future at least. The response of the markets also illustrated that for all her faults, the Chancellor does have one virtue. She is determined not to increase borrowing, at least for day-to-day spending.
Now, that leaves two options – to cut spending or increase taxes. She’s chosen to increase taxes, while Conservatives would argue that the nation needs to live within its means and cut spending instead.
But the third option, increasing borrowing, would be even worse – even though this is what some left-wing Labour MPs desperately want her to do.
As the Chancellor and Prime Minister clearly recognise, the UK’s finances are in such a perilous state that we will run into real problems if we try to borrow even more money. Financial markets would lose what remaining confidence they have, and the cost of borrowing would soar – adding to the huge cost of servicing our debt which already exceeds £100 billion every year (more, to give one example, than the £64 billion spent on schools).
And that’s why a new Chancellor chosen to replace Ms Reeves could be even worse for the country. Potential candidates include Pensions Minister Torsten Bell, the former head of think tank the Resolution Foundation. But anyone who gives in to demands from the Labour left to hike up borrowing would spark another financial crisis that could ruin the UK’s economy for decades to come.
