Reeves’s U-turn on income tax is needless and wrong

Rachel Reeves marched the country to the top of the hill last week... and now she has marched us down again. In her unusual early-morning address in Downing Street, she prepared the nation for a broken promise on income tax. It seemed to be an important moment, when she and the prime minister recognised the need to act decisively to finish the botched job that she started last year of repairing the nation’s finances.

They decided to grasp the nettle and hike up income tax. This would allow them to raise a significant sum of money, enough to cover the downgrade in the productivity forecast and to provide a responsible buffer against bad news, instead of the wafer-thin headroom that was left last year. And it would do so in a way that was fair, spreading the burden among all taxpayers, according to ability to pay, according to The Independent.

The Independent took the view that Sir Keir Starmer and his chancellor had ducked difficult decisions to restrain the planned growth of public spending, but that the decision to break the manifesto promise was necessary, brave and right. The U-turn, therefore, leaves them in a position that is needless, cowardly and wrong.

Of course, the fiscal position has changed, in a favourable direction, in the course of the past few days. And it is good news that the public finances are in not quite as bad a position as the Office for Budget Responsibility thought they were just days ago. But it cannot be right that such a fundamental decision as to break a manifesto pledge can flip from yes to no in a few days when there has been no change in the real economy.

That Sir Keir and Ms Reeves have changed their minds so publicly does not inspire confidence. It suggests that they are deciding policy by what they think they can get away with, rather than by what is in the national interest. It suggests that they panicked last week when they thought they could not avoid an income tax rise in the Budget.

Hence Ms Reeves’s speech, in which she all but announced a rise in the basic rate of income tax, and her interview with the BBC on Monday this week, in which she explicitly said: “It would be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.”

Four days later, it turned out that it was possible after all — presumably without deep cuts in investment, but at the price of a deeper hole in the chancellor’s credibility. We fear that Ms Reeves and the first lord of the Treasury, Sir Keir, are repeating the errors of last year: when they distorted the tax system in ways that inhibited growth and failed to provide enough of a margin to cover contingencies – because they are too cowardly to restrain spending and to raise income tax.

By avoiding an income tax rise at all costs, the government is forced to rely on a jumble of small measures, many of which will have unintended consequences, and most of which will be bad for growth, including by penalising wealth creators so much that some of them will leave the country.

It was significant that the markets responded well to Ms Reeves’s breakfast speech, impressed by her willingness to bear the political cost of raising income tax to secure the public finances; and that they responded badly to the news that she had changed her mind.

This is no way to run a government. The people of Britain understand that governments have to make hard choices, and that the choice between a manifesto breach and trying to muddle through may be a particularly difficult one. But to flip-flop from one to the other just two weeks before a Budget suggests that the government has lost its way.