Reeves faces fight of her life over tax

Rachel Reeves will have to engage in a major pre-Budget spin operation at the Labour conference in Liverpool over the next few days. The chancellor wants to persuade the nation that, when she raises taxes in November, it will not be her fault.

As we report today, one of the reasons she will have to make the unpopular move is that the Office for Budget Responsibility is going to downgrade its forecast for productivity improvement over the next few years. This means that the OBR thinks that growth will be lower, and so will tax revenues, requiring new tax rises or spending cuts to keep borrowing within the limits that Ms Reeves has set, according to The Independent.

The chancellor is entitled to point out that the OBR’s productivity downgrade is a correction to optimistic forecasts made under the previous government, and has nothing to do with any of her policies. As a senior source told The Independent, “the OBR will make it clear that the revision has nothing to do with any of the measures brought in by this government”.

There is a bitter irony here in that many Conservatives, including many supporters of Liz Truss, the brief prime minister, complained about the OBR making it hard for the government to cut taxes. In fact, the OBR’s optimistic forecasts gave the Tory government more scope for cutting taxes than they should have done.

Now that the OBR is bringing its forecasts more in line with the consensus of other economists, the pinch is being felt by the Labour government rather than its predecessor.

So it is not surprising that there are now Labour voices making the same mistake as Ms Truss, which was to think that the OBR was the problem and that ignoring the OBR was the solution. We saw what happened when the Truss government ignored the OBR in 2022: it turned out that the constraint on borrowing was not the OBR but the financial markets. The OBR was merely the referee.

When Andy Burnham, the mayor of Greater Manchester and fantasy alternative prime minister, says, “we’ve got to get beyond this thing of being in hock to the bond markets”, he implies that governments can free themselves from the need to persuade lenders that they will pay their debts. It is a good thing that he is unlikely ever to be allowed to institute the Labour version of the Truss error.

Ms Reeves, on the other hand, understands the fiscal reality, unwelcome though it may be to her audience in Liverpool this weekend and in the country beyond. Unfortunately for her, her justified argument that she is not to blame for all the tax rises she is about to impose is likely to be lost in the partisan bunfight that will surround the Budget, at a time when she, the prime minister and the government are handicapped by extreme unpopularity.

Nor is she completely blameless. She has played a weak hand badly. She locked herself into a claim about a £22bn “black hole” in the fiscal year to this April, which she claimed to have fixed in last year’s Budget. This ignored the risk of a much bigger gap between spending and revenue over the whole parliament, which has now materialised. She contributed to that with the wrong mix of tax rises in the last Budget, including the rise in employers’ national insurance, which was a tax on jobs.

Since then, the prime minister has forced a U-turn on the cut in pensioners’ winter fuel payments. In a panic measure, Ms Reeves tried to cut disability benefit spending without tackling the causes of its predicted rise, prompting Labour MPs to vote it down. And now she has to find more money to lift the two-child limit on benefits, which has more or less been promised by Bridget Phillipson in her deputy leadership campaign.

All of which suggests a Budget tilted too much towards tax rises rather than spending restraint, and towards the wrong sort of tax rises. Unless Ms Reeves decides to bite the bullet and put up income tax, the fairest tax of all, she will have only herself to blame.