Keir Starmer and Rachel Reeves have only themselves to blame for the mess they are in over tax. The key moment was not the defenestration of their welfare bill or the uprising over pensioners’ winter fuel payments. The die was cast more than a year earlier.
In January 2024, the then chancellor Jeremy Hunt implemented a cut in employee national insurance contributions. Four months later he announced a further reduction from 10% to 8% and even hinted that he was considering abolishing employee contributions altogether. It was the mother of all election bribes, costing the exchequer about £10bn a year. It was also entirely cynical, offered in the absolute confidence that the Tories would not be in office long enough to grapple with the consequences. Had they by any chance won the election, he would have had to recoup the tax revenue foregone by either tax increases or by further swingeing cuts to the public sector.
For Labour, this was an obvious trap. Faced with these utterly irresponsible tax cuts at a time when pressure on the public sector was approaching breaking point, Reeves was challenged by Hunt to say whether, if she became chancellor, she would reinstate them. The sensible reply would have been to say: “We will decide if and when we are elected, and discover how much of a mess you have left us.” She might also have added, “And, by the way, the next election will not be about tax cuts. It will be about the dreadful state of the public sector.”
Instead, however, Reeves fell headlong into the trap Hunt had set, promising not only that she would not reinstate his cuts, but incredibly going further and promising not to raise any of the main sources of revenue: income tax, VAT or national insurance. From that moment on the party was doomed.
Labour in opposition is understandably nervous about making commitments on tax, given the near hysteria that can be organised by the Tories and their friends at even the slightest hint of an increase. So nervous, in fact, that Tony Blair and Gordon Brown, on their way to a landslide victory, undertook in advance of the 1997 election that they would stick to Tory spending plans for their first two years in office.
They did not know they were destined to win by a landslide: they expected to win by only a handful of seats. In 2024, however, the political landscape was entirely different and for one very good reason. The Tories were hoist on the Brexit petard. For the first time in living memory, they had to compete for votes with a more or less credible party to the right of them. This was a historic opportunity. It was always obvious that Labour was going to win and win big, if only because of a quirk in the first-pass-the-post electoral system. Instead of trying to out-Tory the Tories on tax, the 2024 election presented a once-in-a-lifetime opportunity for an honest conversation with the electorate about tax. A challenge that both parties conspicuously ducked.
What should Starmer and Reeves have done? In a nutshell, they should have delivered a simple message to the electorate. If we want decent public services, we are going to have to pay for them. And let’s not pretend, as some do, that it can all be paid for solely by taxing the rich. To be sure, there are steps that could be taken to tap the prosperous – a couple more bands on council tax, for example – but the top 10% of earners already account for 60% of income tax revenue. Extra funding on the scale necessary can only come from an increase in the basic rate of income tax – which, by the way, was 22% until Gordon Brown cut 2p off it in return for a round of applause that had faded within 24 hours. Rishi Sunak then followed this up in 2024 with a further 1p cut in the basic rate. Bang went another seven or eight billion.
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For any halfway decent opposition, given the state of the public services and the existential crisis facing the Tories, the Hunt cuts were an unprecedented opportunity to level with the electorate about tax. Instead, Reeves took the opposite tack. She adopted the Tory language, repeatedly talking of the “tax burden”. She could not bring herself to point out the obvious connection between tax and the preservation of the social fabric. She could have argued that tax fairly raised and wisely used is the subscription we pay for living in civilisation. She might have added that, far from being extortionate, the UK is well down the north European league table and, the tax burden in the UK is higher now than at any time since 1950, that is because demands on the public sector are greater than they have ever been.
We have been here before. It is now widely recognised that the 1964 Labour government should have devalued immediately on taking office. As today, its inheritance was dire. The pound, then a reserve currency, was under enormous pressure. The new government could easily have got away with blaming devaluation on the outgoing Tories. Instead, it kicked the can down the road, hoping against hope to avoid the inevitable with the result that in 1967 it was forced into a humiliating U-turn.
“What was your biggest mistake?” I asked Harold Wilson when, as a young journalist, I interviewed him in Downing Street in March 1970. He replied, “That I underestimated the power of speculators to undermine the value of the pound.” Wilson at least had the excuse that in 1964 he had just been elected on a wafer-thin majority. Starmer and Reeves have no such alibi.
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