Theresa May just handed Corbyn's Labour a golden opportunity – so are they smart enough to take it?

The PM has discovered the 'magic money tree' only a year after declaring that it did not exist

Something big in British politics changed this week, but not in the way Theresa May hoped. She would like it to be remembered as the moment the Conservatives pledged to pump an extra £20bn a year into the NHS, addressing her party’s traditional weakness and possibly even neutralising Labour’s biggest weapon.

However, it might prove a pivotal moment for a very different reason.

In his Mansion House speech last night, Philip Hammond confirmed that taxes will rise to pay for the NHS boost. In doing so, the Tories risk throwing away their strong unique selling point as the low tax party, and possibly helping Labour to tackle its biggest weakness – a lack of trust on the economy.

Labour has traditionally been seen as the party with a heart, the Tories as having a head. Despite the public’s deep affection for the NHS, when it came to elections, many people voted with their head, or perhaps their wallet. As May reminded MPs on Wednesday, the Tories have been in power for 43 of the 70 years since the NHS was born.

Now her government is trying to offer both head and heart; her “balanced approach” means investing in public services while still paying down the nation’s debt.

The danger is that the Tories fall between two stools, losing their reputation for economic competence while failing to win people’s trust on public services. The 3.4 per cent real terms spending increase for the next five years will allow the NHS to stand still rather than improve, so the crises of recent years may not be a thing of the past.

“It’s not enough,” a senior Tory and May ally told me. “The figure was determined by the minimum Simon Stevens [chief executive of NHS England] would welcome and the maximum the Treasury would allow.” In his last-minute wrangling with Hammond, the Health Secretary Jeremy Hunt deployed some timely ammunition when the IPPR think tank called for a 3.5 per cent increase.

The Chancellor has another problem: it is difficult to end austerity just for health. He will struggle to hold the line as ministers queue up ahead of his spending review with demands for more money for social care, the police, defence, schools, local authorities and prisons.

At Mansion House, Hammond gave a strong hint he would not raise borrowing to provide the NHS funding. He insisted he would not abandon his fiscal rules, which include debt falling as a share of GDP – a recognition of the political risks of the spending boost. He promised that tax rises would be introduced “in a fair and balanced way.”

This suggests the Tories might continue to raise the personal allowance, taking those near the bottom of the earnings ladder out of tax, while dragging more people into the higher 40p rate. Tory MPs are nervous. So are some ministers: the Cabinet was told recently that living standards, alongside the NHS, are still a major concern.

Squeezing the Tories’ natural supporters would be a huge risk. It would “fair” to target the top five per cent too, as Labour proposes. Hammond might have to drop plans to reduce corporation tax to 17 per cent. “It’s hard to justify if we are raising personal taxation,” said a Treasury insider. It won’t be easy to make his Budget sums add up in November – no wonder Hammond is asking Tory MPs for their tax-raising ideas.

Pre-announcing the NHS cash knocks another hole in the Tories’ credibility. Imagine the reaction of the Tories and their newspaper cheerleaders if Labour announced such a big spending commitment without saying how it would be funded. May has discovered the “magic money tree” only a year after declaring that it did not exist. In learning one painful lesson from last year’s election – that voters had tired of austerity – she has forgotten another: the Tories barely talked about the economy, their trump card, and did not even bother to cost their manifesto pledges.

But all is not lost for the Tories. Hammond’s speech confirms that they will make debt the new dividing line. The D-word will be at the heart of the Tories’ next election campaign, as I revealed in April.

In addressing the NHS crisis, the Tories have changed the terms of political trade. But it would be a mistake for Labour to relax because the centre of political gravity has shifted leftwards, and assume it can now trump any Tory promises by spending even more on anything that takes its fancy. It will need to resist temptation.

Winning the battle of ideas on austerity does not guarantee winning an election. Labour will need to show the same discipline on spending pledges it displayed last year, and insulate itself against Tory claims that it would plunge the nation deeper into debt.

May has handed Labour a golden opportunity. The question now is whether Labour is smart enough to take it.