Rachel Reeves will be forced to break one of her promises – but which?

If Labour inherits the scorched earth of public finances at the election, it will have to put up taxes or borrow more, writes John Rentoul

Reeves has invested a huge amount in building ‘trust’ as her personal brand (PA Wire)

We can imagine Rachel Reeves’s opening words as chancellor in the Commons. “Madam Deputy Speaker,” she will say, “I am announcing this emergency Budget because when we looked at the government’s books, things were far worse than the Conservatives had led us to believe.”

One big difference between 1997 and 2024 is that, back then, Labour could get away with saying it wouldn’t put up taxes. The only promise it made was not to raise “income tax rates”, and when Gordon Brown took over the Treasury, he imposed windfall taxes on the privatised utilities, as promised, and raised another significant amount from taxing pension funds, which had not been mentioned. Most people thought this was fine, as the economy was growing and they felt better off.

That will not apply this time round. Reeves, the shadow chancellor, has been more explicit about the taxes she will not raise. She has no plans to raise taxes at all, except for VAT on school fees and income tax on private equity funds. She was going to raise more money by abolishing non-dom status, but Jeremy Hunt broke into her locker and stole her lunch money.

She still hasn’t said, a month after the Budget in which this theft took place, how she will replace the funding, which Wes Streeting, the shadow health secretary, needs to find for his modest plans to improve the NHS.

Meanwhile, she has been asked about all sorts of taxes and the answer is always the same. She has “no plans” to raise income tax, national insurance contributions or corporation tax. She has no plans to impose a wealth tax. On the contrary, she would like to see the tax burden reduced.

The only loophole in her self-imposed straitjacket is loopholes. She is keeping tax “loopholes” under review. That is a word that may have to be put to strenuously creative work a few months from now. I am told that the search for new sources of revenue is not going well. There is nothing hidden in the Treasury’s list of options for tax rises that is as painless as Brown’s pension tax in 1997 – yes, I know that some people are still sore about it today but, as a matter of high politics, it was a painless success for the vast majority and helped to pay for the early stages of rescuing the NHS and schools from two decades of neglect.

All the easy options have been used up by Reeves’s predecessors, leaving only a range of unpalatable choices. But those choices will have to be made because the other big difference between 1997 and now is the state of the public finances. When Brown took over, the government was heading for a surplus: within three years it was raising more in taxes than it was spending. New Labour imposed stealth taxes and kept a tight lid on public spending – overdoing the fiscal conservatism to reassure the voters that it could be trusted with their money.

Nothing like that is possible now. Everyone knows – although there is a conspiracy of silence between the Conservative and Labour front benches about it – that the government’s public spending plans for after the election are “a work of fiction”. Richard Hughes, the chair of the independent Office for Budget Responsibility (OBR), admitted in January that this was what “some people” called them, and he didn’t sound as if he disagreed with them.

How could he? It is clear to most people that the NHS, social care, schools, universities, criminal justice and asylum all need more money, and it is clear to many that the demands for more public spending on housing, welfare and defence are pressing.

Whoever wins the election, something will have to give. And if Labour wins, that something cannot be cuts in public spending. Reeves will either have to put up taxes or borrow more.

Borrowing to pay for current spending is a no-no. That was in effect what Liz Truss tried to do: she cut taxes without cutting spending, leaving the markets to assume that the gap would be covered by borrowing.

Some Labour people were excited by Lord Macpherson’s comment on Thursday, when the former top civil servant in the Treasury poured scorn on one of Reeves’s fiscal rules: “No one gives a toss about some weird rule which is about what’s going to be happening to debt in five years’ time which you can always revise away.”

But he was not announcing a possible new source of magic money – not even a magic money bonsai bush. He was joining the debate about whether additional borrowing for capital investment might be prudent. So even if Reeves junked her debt rule (total debt to be falling in the fifth year of a five-year rolling period), it wouldn’t solve her problem with the pressure of current spending: NHS salaries are not “investment”.

That means that – unless the economy suddenly grows faster than expected – taxes will have to go up. An unforeseen growth spurt is certainly possible. It is about time that the OBR’s forecast erred on the side of pessimism – the irony of Trussite complaints about OBR forecasts always being wrong is that they have tended to be too optimistic.

But if Reeves doesn’t get lucky in that respect, she will have to choose which of her promises to break. The obvious one might be corporation tax: she could put that up by 3p in the pound, back to the 28p it was under New Labour. That would raise a lot of money but it would throw her reputation as a predictably pro-business iron chancellor into the smelting furnace.

Without access to the Treasury spreadsheet of options, I cannot predict which of the slightly more palatable but still difficult measures she might choose. She may be able to find a way to raise money without increasing any of the main named taxes that she has said she has “no plans” to increase. She will still be breaking her implied promise not to raise the level of general taxation, but she and Keir Starmer can probably live with that.

The first question is how much of a problem it will be for Reeves and Starmer to fight an election campaign saying that they won’t raise taxes when everyone knows that they will. But the next question is how damaging it will be for an incoming Labour government to appear to break its promises. Reeves has invested a huge amount in building “trust” as her personal brand. Will she be able to blame everything on the terrible state in which the Tories have left the public finances, or will the new government be accused of betrayal straight away?