Chancellor Reeves takes initial steps to raise taxes
On Friday 29 July, Chancellor Reeves presented the findings of an internal review into the UK’s public finances to the House of Commons ahead of Parliament rising for recess. Reeves claimed that the UK has a £22 billion fiscal blackhole i.e. unfunded spending commitments, and accused the outgoing Conservative government of hiding these spending shortfalls from the public. The Conservatives responded that almost half of the outlays were Reeves’ own spending decisions.
Our view:
Chancellor Reeves’ first acts as Chancellor indicate Labour will take a higher tax, higher spending, pro-interventionist approach to governing.
Labour is capitalising on its honeymoon period to undertake some of its most controversial decisions while pinning any potential blame on the previous Conservative government. This tactic will continue to work into Q4 as the Conservatives spend the coming months electing a new party leader and squabbling amongst themselves about how to respond to strong electoral showings from Reform UK and the Liberal Democrats.
The Conservatives are not functioning as an opposition party. The shadow Cabinet is mainly composed of ex-Cabinet members from former PM Sunak’s government. With little chance to join the next party leader’s shadow Cabinet, many are facing a spell on the backbenches.
Our wider view:
Chancellor Reeves’ first acts indicate a higher tax, pro-interventionist approach to governing. Couched within accusations that the Conservatives have left the UK’s public finances in a perilous state by spending on failed policies like the Rwanda deportation scheme, Reeves took the opportunity to announce a nearly £10 billion pay package for UK public sector workers. With nearly a fifth of the UK workforce employed by the state, higher pay and stronger employment rights will make inflation stickier and higher in the medium- and long-term, while also exposing the government to further strike action (almost immediately after the agreement was announced, one of the junior doctors’ trade union leaders called for further strikes later in the year). Trade unions representing elements of the civil service also serve as large donors to the Labour Party, likely narrowing the government’s range of available options in future strikes.
Reeves also confirmed that tax increases and curtailed investment incentives for the energy sector in the North Sea will go ahead earlier than planned. Most energy sector analysts expect the move, which will end most investment incentives on 1 November, but not provide detail until 31 October, to be existential for the sector and could lead some Scottish cities to see double digit increases in unemployment. Labour’s 36 new Scottish Labour MPs will likely prove crucial to any softening of this stance, even as Energy Secretary Ed Miliband MP last week gave himself powers to spend billions to establish GB Energy and on state-backed projects, much of which will likely be offshore wind farms in Scottish waters.
Labour is capitalising on its honeymoon period to undertake some of its most controversial decisions while funnelling blame on to the previous Conservative government. Reeves’ announcement, although overshadowed by tragic reports of multiple stabbings of children at a dance class in Wales, continued a trend of policy announcements aimed at consolidating government control in sensitive areas like energy policy and securing Labour’s internal power brokers’ support i.e. civil service unions, while pinning any of the unpopularity on the previous Conservative government. As Parliament rose for recess on 30 July, Deputy Leader and Housing Secretary Angela Rayner MP also announced a new policy of house building targets on “greyfield” land, which she acknowledged will likely upset some voters, but which Labour views as crucial to its policy agenda of housebuilding to bolster its support among the non-elderly.
The Conservatives are not functioning as an opposition party. The Conservatives are in the middle of a months-long leadership contest to replace former PM Rishi Sunak. Roughly half of sitting Conservative MPs are currently involved in the leadership contest, either by running for election or backing their preferred candidate, meaning many of the party’s MPs are focused on securing their stake in the future of the Conservative party rather than scrutinising Labour government policy. This distraction has been a gift to Starmer’s new government, as a lame duck shadow Cabinet haphazardly and tepidly scrutinises his new government’s first acts. Labour will likely seek to capitalise on this and continue to progress their policy agenda until at least November, when the new Conservative leader is expected to be announced.
Looking ahead, Parliament will return on 2 September for a ten-day period of legislating before rising for three weeks for party conference recess. Labour will likely table more legislation during this sitting and then use its party conference, running from 22 – 25 September, to soften the ground for tax hikes at its first Budget, slated for 30 October. The Chancellor has indicated that Labour will raise taxes, but not specified which. Although ruling out rises in some of the biggest revenue raisers, Reeves could create new forms of tax, as a way of keeping Labour’s election manifesto commitments, while also funding their spending priorities and keeping their internal stakeholders happy.