Rachel Reeves' pledge not to raise taxes again is in doubt

Rachel Reeves’s promise not to raise taxes again looked in doubt after less than 24 hours yesterday after a Cabinet colleague failed to repeat it.

The Chancellor made the pledge on Monday as she sought to placate business leaders about her £25 billion raid on employer national insurance - part of an overall £40 billion tax-raising Budget.

She told the Confederation of British Industry (CBI) annual conference: ‘I’m really clear, I’m not coming back with more borrowing or more taxes.’

But yesterday, Business Secretary Jonathan Reynolds appeared to contradict her by apparently suggesting instead that any tax hikes would be on a lesser scale.

Mr Reynolds told MPs: ‘What the Chancellor was saying at the CBI was to make clear... that there will not be a further ask of the business community comparable to what we had to do at the beginning of this parliament.’

It came as economists voiced significant doubts about the Chancellor’s pledge not to cut taxes, saying the remarks could ‘come back to haunt her’ and that she would need to ‘get lucky’ with better growth to fulfil it.

Ben Zaranko, Associate Director at the Institute for Fiscal Studies, a leading economic think-tank, said that with pressures mounting on the public sector it would be ‘extremely difficult’ to stick to present spending plans. 

‘It wouldn’t be at all surprising if those plans get topped up,’ Mr Zaranko said.

If the economy improves, Ms Reeves would have more money to pay for the extra spending but that is not guaranteed.

‘The question then is whether the Chancellor gets lucky on growth or whether she has to come back with more tax rises,’ said Mr Zaranko.

Business leaders are furious with Ms Reeves over the NI hike which they say poses a grave threat to jobs. They have warned it will be passed on in the form of lower wages and higher prices.

Paul Dales, chief UK economist at consultancy Capital Economics, said: ‘I can see why she said it.

‘The Budget hasn’t gone down well and she needs to convince everyone that it was a one-off so people can move forward without worrying about a repeat. But there’s a chance it will come back to haunt her.’

Already, the cost of government borrowing on financial markets has risen in reaction to Ms Reeves’s spending splurge, reducing the Chancellor’s ‘headroom’ to meet her rule on balancing the books, Mr Dales noted.

He said it ‘wouldn’t take much more’ of such increases, or a weakening of the economy ‘to mean that the rule will be broken unless she raises taxes or cuts spending’

‘So she’s skating on thin ice already,’ Mr Dales added. ‘It’s certainly a risky strategy.’

Julian Jessop, economics fellow at the Institute of Economic Affairs, a free-market think-tank, said the pledge not to raise taxes further ‘lacks credibility’.

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‘Her own fiscal rules mean there are many scenarios in which taxes could have to rise further,’ Mr Jessop added.

And it comes after Labour has already broken its promise not to put up national insurance.

‘The breach of the manifesto and election campaign commitments on tax (in spirit if not necessarily the letter) have undermined trust in anything the new government says,’ said Mr Jessop.

He said Mr Reynolds ‘rowing back’ was a ‘more credible position’, suggesting that Labour will not again raise £40 billion in a single Budget but ‘still leaves the door open for many smaller rises’.