Rachel Reeves will be forced to raise taxes again in her Budget in the autumn – and so she should

Fair, targeted tax rises would give Labour more chance of delivering the better public services it promised last year, on which it will be judged at the next election, argues Andrew Grice

Liz Kendall’s announcement of £5bn a year of welfare cuts will help get Rachel Reeves off the hook when she presents her spring statement on Wednesday next week. But it won’t be a case of with one bound, Reeves is free. She is likely to pencil in further cuts to departmental spending from 2026-27 to recreate a big enough cushion against her self-imposed fiscal rules.

“We recognise the world has changed,” Reeves said after the government announced a hike in the defence budget. But a growing number of Labour MPs, including some cabinet ministers, suspect the chancellor is in denial about the new world. They are pressing her to tweak her fiscal rules or raise taxes to avoid “Austerity 2.0”.

Some ministers say privately the Treasury’s instinct to muddle through with piecemeal cuts – and hope that higher economic growth will make some of them unnecessary – does not measure up to the huge challenges of the new world. The government has raided the overseas aid budget to raise defence spending to 2.5 per cent of GDP but has no idea how to hit its target of 3 per cent in the next five-year parliament.

Even that might not be enough, if the UK is to play its full part in Europe taking responsibility for its own security, as we should.

Although many Labour backbenchers oppose the cuts to disability benefits, Labour insiders suspect 80 potential rebels will be whittled down to about 30 when the legislation is voted on. Labour critics do not buy Kendall’s argument she did not “start from a spreadsheet” and would be reforming a failing system “whatever the fiscal position”. The changes looked rushed, and driven largely by Treasury spreadsheets as Reeves tried to make her sums add up next week.

Many Labour MPs who will hold their nose and support the government will warn they have no appetite for further cuts. Several cabinet ministers agree as they struggle to defend their own budgets ahead of a government-wide spending review in June.

One Reeves ally told me: “Rachel is not going to change her fiscal rules. So the big debate now will be about whether to raise taxes in the autumn Budget.” The chancellor will likely extend the freeze in tax and national insurance thresholds and allowances beyond April 2028, when it is due to expire. But many Labour figures think she will need to go further to avoid spending cuts the party would not wear.

When Anneliese Dodds resigned as development minister over the aid cuts, she said she had expected the cabinet “would collectively discuss our fiscal rules and approach to taxation, as other nations are doing. Even 3 per cent [of GDP on defence] may only be the start, and it will be impossible to raise the substantial resources needed just through tactical cuts to public spending. These are unprecedented times, when strategic decisions for the sake of our country’s security cannot be ducked.” Dodds was right.

Significantly, when the cabinet later had such a discussion, about half the cabinet expressed doubts about Reeves’s fiscal rules but Keir Starmer gave her his full support.It’s not only Labour figures who see the need for a rethink. Mervyn King, the former Bank of England governor and now a crossbench peer, said Reeves should ditch Labour’s “irresponsible” pre-election promises and raise income tax.

Reeves allies tell me she has no intention of imposing another tax hike. Yet if she chose to, she could argue persuasively that Labour’s manifesto pledge not to raise income tax, national insurance or VAT has been overtaken by global events. As John Maynard Keynes said: “When the facts change, I change my mind.” With one bound, Reeves really would be free.

Fair, targeted tax rises would give Labour more chance of delivering the better public services it promised last year, on which it will be judged at the next election. The chancellor intended last October’s £40bn of tax increases to be a one-off but now admits the defence boost is “not a one-off thing.” It will have to be funded permanently and there is not another magic money tree like overseas aid to shake. Reeves won’t want to be remembered as a tax-raising chancellor. Her advisers point out the tax burden is at its highest since the end of the Second World War.

Yet the world really has changed; Britain might soon have to fight another war in Europe – or at least bolster its defences to help prevent one by deterring Russia. So Reeves will need to change too. Why not lead the debate on tax and spending the two main parties denied the public at last year’s election? The excuse of “we have an election to win” doesn’t apply now and Starmer has a huge majority to approve tax rises to put the public finances on a stable footing in the new world.

Labour might even get some credit from voters for treating them like grown-ups.