If something is worth doing, it is worth doing well.
In that spirit, if Rachel Reeves is to break her party’s manifesto pledge not to raise national insurance, there is no point only hiking employer’s contributions. The Chancellor will be accused of u-turning, deceiving voters, and taxing jobs whatever happens. So she should pick the route that raises the most revenue, and reverse Jeremy Hunt’s rate cuts.
That is my advice to Reeves – unsolicited, unwanted, and almost certainly unheeded – ahead of her first Budget. After twenty minutes of tinkering with the Chancellor game on The Financial Times website, it’s only natural for one to feel like an expert on balancing the books. Give it a go.
Labour’s manifesto was unambiguous. “Labour will not increase taxes on working people, why is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT,” it said. Wanting to spike Tory attempts at a “Tax Bombshell” attack, the Chancellor committed herself not to raise the three taxes that contribute almost 70 per cent of revenue.
At the time, this was pitched as an essential act of appeasement for Middle England. Voters had endured the most tax-raising Parliament since the war. Suggesting Labour wouldn’t hike rates further marked a clear break with Jeremy Corbyn, and another lesson learnt from the 1997 campaign.
But what seemed prudent in the comfort of Opposition has proved a straightjacket in government. Reeves conjured up £22 billion black hole in the public finances and tasked herself with filling it. Having pledged fealty to the OBR, applying the fiscal Polyfilla becomes progressively more difficult as the bods advise her that her proposed hikes won’t be as lucrative as she hoped.
Hence why Labour is now refusing to rule out when asked a hike in the employers’ rate of national insurance. Their semantic argument is that, since this is an increase in the rate that businesses pay, it can’t be considered a rise on “working people” and is therefore within their manifesto pledges. Look! Laura Trott mentioned it at the election. That provides Reeves with carte blanche.
Unfortunately for the Chancellor’s conscience, Paul Johnson, the director of the Institute for Fiscal Studies – the independent voice of God – thinks this is baloney. Increasing the employer rate would be a “straightforward break” of the manifesto. Where were the caveats?
What constitutes a breach is in the eye of the beholder. Labour will say it isn’t; the Tories will say it is, even if we suggested that Reeves hadn’t ruled out a rise only four months ago. With such a large majority, the Chancellor is unlikely to have to repeat Philip Hammond’s reverse ferret in 2017, when a backbench rebellion forced him to reconsider a hike in the rate on the self-employed.
Since the OBR has warned that raising the levy would result in lower wages for employees, the accusation that Reeves will be increasing the burden on “working people” will remain live. With Labour having depleted its stocks of public goodwill, it is unlikely that her theological wrangling will receive much sympathy. A tax hike is a tax hike; a broken promise is a broken promise.
In which case, if the Chancellor will receive public opprobrium anyway, wouldn’t it make sense to do so whilst raising as much revenue as possible? Ahead of the election, Labour signed up to Hunt’s successive cuts to the personal rate of national insurance. 4p was cut, saving the average earner £900 a year. Few noticed, fewer were grateful, and little electoral benefit was reaped.
But it did succeed in boxing Labour in since Reeves signed up to the cuts. Since they were worth around £20 billion a year, reversing it would go a long way in plugging that hole. If she went ahead and hiked the employer rate as well, she could be looking at tens of billions in increased revenue – which, according to this morning’s papers, is exactly what she is after.
If I was a Labour Chancellor keen on appeasing my backbenches with a few well-timed increases in spending on public services – alongside whatever increased borrowing she can generate through fiddling with her fiscal rules – this would seem a no-brainer. The manifesto pledge on income tax, VAT, and national insurance may have won her party 20 extra seats. But it was unwise.
As Rishi Sunak discovered, making it through five years with such a pledge unbroken can prove impossible with the current spending pressures that ministers are subject to. If one is going to fess up to their manifesto pledges being unrealistic, best to do it at the start of a Parliament, rather than later. Few remembered George Osborne’s 2010 VAT hike by the 2015 election.
Tinkering at the edges can only take the Chancellor so far. As long as both parties continue to pledge no rises to the big three in their manifestos, and as long as MPs continue to bury their heads in the sand as to the cuts that will be required to future-proof British social democracy, Reeves and her successors will remain trapped. Now is her best chance to break out.
I can promise her that the Tory attack lines will be the same whatever she chooses.