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Chancellor Rachel Reeves has said she will not resign if she breaks a core pledge in Labour’s manifesto by raising income tax in this month’s Budget, suggesting that the financial markets would panic if she quit.
Reeves also gave a strong hint that business would have to pay more in taxes in what she insisted would be a “fair” Budget, declaring: “Tax isn’t the only thing that affects business sentiment and business investment.”
The chancellor was speaking on Tuesday evening after a day in which she attempted to prepare the public and Labour MPs for a tough Budget on November 26, including the prospect of hefty tax rises.
Asked by LBC’s Andrew Marr is she would resign if she raised income tax — in breach of a key promise in Labour’s election manifesto — Reeves replied: “And what do you think would happen in the financial markets if I did that?”
The chancellor believes the bond markets are behind her strategy, which includes sticking to her “ironclad fiscal rules” and bearing down on borrowing, even if that means politically painful tax rises.
She said that tax increases would be based on the principle that “those with the broadest shoulders should pay the most”, adding: “I want people to see that I’m a Labour chancellor.”
Reeves claimed that her £25bn hike in employers’ national insurance contributions in last year’s Budget had been accompanied by “scare stories”, and that the jobs market, retail sales and growth had defied gloomy predictions.
Earlier on Tuesday Reeves opened the door to an income tax rise when she said the “national interest” would trump political expediency in this month’s Budget.
Reeves used an 8.15am speech in Downing Street to warn she would use the Budget to tackle debt and that she was “determined to put the country on a more sustainable footing”.
Asked if she was prepared to break the Labour manifesto promise not to raise income tax, even if that might cost the party the next election, Reeves said: “We have got to do the right thing.”
She added: “If you’re asking what comes first, the national interest or political expediency, it’s the national interest every single time for me and it’s the same for Keir Starmer too.
“If we are to build the future of Britain together, we will all have to contribute to that effort. Each of us must do our bit.”
Chancellor Rachel Reeves insisted that her fiscal rules are ironclad
The UK's national debt now stands at 2.6 trillion pounds, equivalent to 94% of GDP. Before the mini budget, our borrowing costs were in the middle of the pack compared to other advanced economies. But now we have the highest borrowing costs of any G7 country. Today, 1 in every 10 pounds of taxpayers' money is spent on debt interest. Not paying that debt down. But just paying the interest to our creditors. At the budget last year, I changed the fiscal rules to strike a careful balance. To invest more in capital alongside a credible plan to grow our economy and bring debt down within this parliament. That was the right decision to break the cycle of low productivity and low growth. But that additional investment can only be delivered because markets know my commitment to the fiscal rules is ironclad.
Chancellor Rachel Reeves insisted that her fiscal rules are ironclad © Reuters
Labour officials insisted no final decision had been taken to raise income tax and that Reeves was still weighing up whether a fiscal hole estimated at about £30bn can be filled without breaking manifesto promises.
No government has raised the main rates of income tax since Labour chancellor Denis Healey’s Budget in 1975; doing so would be politically seismic. The Conservatives insisted that Reeves would have to resign.
There was a muted reaction to Reeves’ speech in the markets, with gilt prices falling slightly but remaining higher on the day.
Reeves’ message was partly aimed at the public but also served as an economics lecture to Labour MPs, as she sought to explain why she needed to tame debt in order to cut government borrowing costs.
She said the aim was to free up money for public services and ultimately tax cuts. Reeves noted that one pound in every 10 of taxpayers’ money was spent on servicing the UK’s debt.
“It’s important everyone, public and politicians, understands that,” she added.
One of Reeves’ fiscal rules requires her to have debt falling year on year by the end of the decade, but in the near-term she is running a significant deficit.
The chancellor also warned Labour MPs who had resisted £5bn of welfare cuts that there was “nothing progressive” about a benefits system that left one in eight young people not in education or employment.
Reeves’ speech was also an attempt to blame the previous Conservative government for her predicament, as she confirmed that official forecasts would sharply downgrade estimates of Britain’s future productivity growth.
The chancellor said Tory austerity policies and Brexit were partly to blame, alongside cuts to public investment over the past decade. “I have to respond to the world as it is, not as I would want it to be,” she said.
Conservative leader Kemi Badenoch responded that Reeves was “making excuses”, adding the chancellor had delivered a “waffle-a-thon” and a “masterclass in managed decline”.
Reeves said her Budget would reflect “Labour values” and that she rejected the deep spending cuts implied by “austerity” and would protect key public services including the NHS.
Reeves also indicated that she would beef up her margin of error against meeting her fiscal rules, which include funding day-to-day spending — excluding investment — entirely from tax receipts by 2029-30.
Her refusal to countenance big spending cuts and her determination to strengthen her fiscal “headroom” against future global turbulence mean that she will turn largely to tax rises to fill the fiscal hole in her Budget.
The option of raising the basic, higher and additional income tax rates by 1p is favoured by some in the Treasury as the simplest way to raise more than £10bn a year, but it could come at a heavy political cost for Labour.
Some close to the decision-making process said Reeves and Prime Minister Sir Keir Starmer were still weighing up whether a series of smaller tax rises could be deployed instead to fill the fiscal void.
AGAIN REEVES IS GAME-PLAYING!