Five months ago I made some predictions about what could be in Rachel Reeves’ Budget, Labour’s first chance to tax and spend for 14 years.
Praise be. In a career first, I was right to say there was a good chance the Chancellor would reintroduce a “pensions death tax”. You didn’t have to be Mystic Meg to work out that pensions had simply become too good a way to dodge inheritance tax.
It was the kind of move you’d expect of a Labour chancellor and, with the manifesto pledge not to raise income tax, National Insurance or VAT, Reeves had few other places to turn. The move will raise £3.4bn in the first three years and not bother many Labour voters: public sector workers with defined benefit pensions, of course, will not be affected.
Businesses were also targeted, with employer NI due to rise in April. In November, a month after the Budget, the Chancellor assured employers she would not be coming back for more.
She told the CBI conference: “I faced a problem, and I faced into it…we’ve put our public finances back on a firm footing, and we’ve now set the budgets for public services for the duration of this Parliament.
“Public services now need to live within their means because I’m really clear, I’m not coming back with more borrowing or more taxes.”
This was a mistake.
As with her pre-election pledge not to raise the three biggest revenue-raising taxes, saying she will not be raising taxes again is a promise she probably can’t keep. And it is a promise no politician should ever make. Anything can happen in politics; a week is a long time and five years is an eternity.
Already the Government may be forced to shake down the nation again. Reeves has sewed her own straightjacket and then been forced to put it on at the first opportunity.
The National Institute of Economic and Social Research (Niesr) has warned the so-called “headroom”- the amount the Government can borrow without breaking its own fiscal rules – left by the Chancellor after the Budget has been wiped out.
It said: “Without changing taxation and spending plans, this means that there is no buffer through which to absorb cyclical economic shocks were they to materialise over the remainder of the parliament.”
That means the Spring statement on 26 March could end up being more like a mini Budget, though obviously Reeves will be doing everything she can not to draw comparisons with Kwasi Kwarteng’s disaster.
So what could be in it? It is too early to bin the manifesto pledges and so the Chancellor once again faces a choice between fiddling for pocket change (like the inheritance tax raid on farmers) or something dramatic-but-nigh-on-impossible, like reforming pensions tax relief.
It’s been reported that some corners of the City are lobbying for extra incentives to encourage investment in the stock market. The way to do this, goes the argument, is to scale back the generous perks afforded cash Isas.
The only way the new Government can achieve its aims is economic growth. Pushing retail investors out of cash and into the stock market in theory should help UK Plc (though it’s hard to stop people finding ways, probably via funds, of accessing sexier American stocks).
Despite the growing rumours, I don’t think Reeves is daft enough to go after savers, who are disproportionately old and already under the cosh with the removal of universal winter fuel payments. She doesn’t strike me as someone who is relishing upsetting vast swathes of the electorate, including her own MPs. The savings would also be minimal, unless pension allowances were cut at the same time, and she needs cash.
With so many untouchables – from defence spending to the state pension – I expect the statement in March to have the usual minor fiddles. But I think the groundwork will be laid for more upheaval in the autumn, that
gives the government long enough to get us used to the idea that something else will have to give.
