Kate Andrews Kate Andrews

Will Labour raise taxes?

Rachel Reeves (Photo: Getty)

What is Labour’s tax-and-spend agenda? This is an outstanding question the party needs to answer before polling day – and Labour seems to know it. That is presumably why shadow chancellor Rachel Reeves sat in the BBC One hot seat on the first Sunday of the election campaign. ‘I totally agree I have to show the sums add up’ Reeves told Laura Kuenssberg this morning. 

But what will be done to make that possible: higher taxes, more borrowing, or a reduction in spending? Unsurprisingly, Reeves did not want to make firm commitments in most of these areas. The shadow chancellor did commit though once again to not raising certain taxes. ‘We certainly won’t be increasing income tax or National Insurance,’ Reeves told Kuenssberg. (Labour has also previously stated that it will not bring in a wealth tax, nor will it further raise corporation tax in its first term, though neither specific tax was mentioned today.) Of course this leaves the door open for countless other tax hikes – ones which go much further than Labour’s current proposals, such as adding VAT to private school fees and extending the windfall tax on energy.

It seems something will have to give, as Reeves firmly rejected the current government’s strategy of making spending cuts in the next parliament to make the numbers add up. After Jeremy Hunt’s last Budget, the Institute for Fiscal Studies calculated that unprotected departments could be facing cuts worth up to £20 billion a year across the board by 2028-29. How exactly would Labour tackle this spending black hole?

‘I don’t want to make any cuts to public spending’, Reeves insisted this morning. ‘There’s not going to be a return to austerity under a Labour government.’ This was a rejection of the idea of spending cuts, but it was by no means a promise not to implement them. Her answer instead, throughout the interview, was to ‘grow our economy’. It’s a point that is equal parts true and meaningless: there is no way the National Health Service or the state pension can be sustained without boosting growth long-term, but as Liz Truss learned the hard way, simply talking about the benefits of growth is no substitute for the policies that deliver it.

This tax and spend question is further complicated by Keir Starmer’s own comments this week. When pressed by Times Radio on Friday on how he will square the promise of no further tax rises and no further spending cuts, the Labour leader said ‘where there are tax rises, we have set out what they will be and what the money will be spent on.’ This implies that it’s the pledges Labour has already made – none of which are expected to raise a large amount of revenue – which will have to account for the additional money coming into the Treasury. Were this to be the case, we should not expect to see any major spending promises in Labour’s manifesto – the cash simply won’t be there to fund it. It also suggests that contentious areas for the party – public sector pay, for example, or more money promised for the NHS alongside reform – may become even more difficult to manage.

Still, Starmer’s comments are also somewhat vague. Is he talking about the pledges Labour has already made, or ones we are about to discover in the party’s manifesto? Either way, this weekend has shone a bit of light on what a tricky area fiscal policy still is for Labour. The party has been politically clever to avoid making any big tax or spending promises during the past few years – nothing major pledged means relatively minor scrutiny. But with Labour so close to power, that is no longer a serious option. Starmer and Reeves know they must kill any suggestions of a tax raid – as that would undoubtedly spook the public – but they can’t realistically rule out major tax rises given they want to spend more than Rishi Sunak.

There is one potential revenue raiser that has not been fully teased out: borrowing. The idea was quickly batted away this morning as Reeves lamented the UK’s debt-to-GDP ratio nearing 100 per cent, while promising to stick to ‘tough spending rules’ if she found herself in the Treasury. 

It would be easy to get the impression from this that Labour has ruled out borrowing more completely. But as I say in the Daily Telegraph this weekend, no such assumption should be made. The current fiscal rule used by the Tories – that debt as a percentage of GDP must be falling on a five-year, rolling basis – is a ridiculously loose rule that allows debt to keep spiraling. So long as the next government promises every year that in another five years’ time it will make some tough decisions, ministers can keep spending in the meantime, with no serious plans to get levels of public debt falling.

This is how Hunt has managed to deliver his employee National Insurance tax cuts – as well as more funding for the NHS and a renewed commitment to the pension triple lock – and still make the numbers add up. No doubt Reeves will be using the same mechanism to make good on Labour’s promises. It is not ‘tough’ or restrictive what Labour may inherit from the Tories: it is a free pass to spend.