Rachel Reeves still needs to level with the British people over tax rises

Editorial: The chancellor’s Budget in October was a gamble that the outlook would brighten. It did not pay off

Rachel Reeves gambled in her Budget in October. The chancellor took many of the right decisions to start to restore the public finances, even if The Independent did not agree with the mix of tax rises that she chose. Too much of the burden fell on employers – and therefore indirectly on their employees – in the form of the rise in national insurance contributions, which will take effect in two weeks’ time.

But her bigger problem was that she was too emphatic. The “ironclad” chancellor suggested that she had taken tough decisions to fix the public finances that she had inherited in such a poor state from a desperate and exhausted Conservative government.

She implied, and indeed actually said, in a few loose words to the Confederation of British Industry after the Budget, that she was “not coming back with more borrowing or more taxes”. This was quickly qualified by adding “on the scale of this Budget”, but the damage was done.

She gave the impression that she had filled the “black hole” and would now be concentrating on building the New Jerusalem on the firm foundations thus laid. That is the trouble with astronomical analogies: any junior physicist knows that you cannot fill a black hole – its infinite gravity will swallow anything in its path.

Far from being a one-off correction to the public finances, last year’s Budget sailed so close to her fiscal rules that it was as likely as not that she would indeed be “coming back for more”. She gambled that the economic outturn would be better than predicted by the Office for Budget Responsibility. As Rupert Harrison, former adviser to her predecessor George Osborne, put it, “Reeves bet the house on her cards turning up trumps and instead she got Trump.”

For all her talk of fiscal responsibility, she left such a small margin for error that it was quickly wiped out by a stalling of business confidence, blamed in many quarters on the reaction to her Budget, even before Donald Trump’s declaration of a trade war depressed the global outlook.

So here she is at square one again. She will face the House of Commons on Wednesday and have to confess that, in just five short months, the economic headwinds have been more adverse than expected and a course correction will be needed.

She will naturally claim that, having shaved £5bn a year off the welfare budget in five years’ time, her friend Liz Kendall, the work and pensions secretary, has already done much of the work of putting the public finances back on course. She may mention other billions that ingenious Treasury officials have found down the backs of some overlooked sofas, but her main objective will be to say: “Nothing to see here; move along please.”

She will be less convincing this time. Already the excuse of the most awful fiscal inheritance since the Second World War is wearing thin. People do not want to hear more excuses about unforeseen pressures on public spending: the job of a prudent chancellor is to prepare for unexpected challenges.

She remains trapped by Labour’s unwise pre-election promises not to raise most of the taxes that are capable of raising the most money. That was part of a larger failure to be straight with the British people – an unwillingness to tell them that we have been living beyond our means for some time.

British voters tend to believe that they are overtaxed, but when compared with most of our northern European neighbours this is not so. Ms Reeves will not say any of that. Instead, we are told that she will continue to set her face against any tax rises at all – which means deeper real-terms spending cuts in unprotected departments such as justice, local government and transport. If so, she cannot complain if people call it austerity.

She will have to end her refusal to discuss tax rises at some point. It is already widely assumed that, in this autumn’s Budget, she will extend the freeze on income-tax thresholds. The Social Market Foundation has proposed some tax rises that would not breach Labour’s manifesto, such as on online gambling and on vacant and foreign-owned property. The Independent has suggested a “Robin Hood” tax deal for non-doms that would encourage them to move here and pay more taxes here. Some Labour MPs are attracted to the mirage of an unworkable wealth tax.

But in the end, it might make sense for Sir Keir Starmer, as first lord of the Treasury and exploiting his new-found confidence, to say that the world has changed – and to propose an increase in the fairest and most efficient tax of all: income tax. Will he overrule his risk-taking chancellor and insist that she takes a really tough decision?