Labour’s tax increases are pushing workers and investors abroad.
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Tag: Rachel Reeves
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Opinion | Britain Budgets for National Decline
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Britain’s unpopular government prepares a high-stakes budget and hopes for growth
LONDON (AP) — After being elected in a landslide last year, Britain’s Labour Party government delivered a budget it billed as a one-off dose of tax hikes to fix the public finances, get debt down, ease the cost of living and spur economic growth.
A year on, inflation remains stubbornly high, government borrowing is up and the economy is turgid. The annual budget, due on Wednesday, is expected to bring more tax hikes in pursuit of the same elusive economic boom.
Rain Newton-Smith, head of business group the Confederation of British Industry, said Monday that “it feels less like we’re on the move, and more like we’re stuck in ‘Groundhog Day.’”
It’s not just businesses who are concerned. Alarmed by the government’s consistently dire poll ratings, some Labour lawmakers are mulling the once-unthinkable idea of ousting Prime Minister Keir Starmer, who led them to victory less than 18 months ago.
Luke Tryl, director of pollster More in Common, said voters “don’t understand why there has not been positive change.
“This could be a last-chance saloon moment for the government.”
Not much room for maneuver
The government says Treasury chief Rachel Reeves will make “tough but right decisions” in her budget to ease the cost of living, safeguard public services and keep debt under control.
She has limited room for maneuver. Britain’s economy, the world’s sixth-largest, has underperformed its long-run average since the global financial crisis of 2008-2009, and the center-left Labour government elected in July 2024 has struggled to deliver promised economic growth.
Like other Western economies, Britain’s public finances have been squeezed by the costs of the COVID-19 pandemic, the Russia-Ukraine war and U.S. President Donald Trump’s global tariffs. The U.K. bears the extra burden of Brexit, which has knocked billions off the economy since the country left the European Union in 2020.
The government currently spends more than 100 billion pounds ($130 billion) a year servicing the U.K.’s debt, which stands at around 95% of annual national income.
Adding to pressure is the fact that Labour governments historically have had to work harder than Conservative administrations to convince businesses and the financial markets that they are economically sound.
Reeves is mindful of how financial markets can react when the government’s numbers don’t add up. The short-lived premiership of Liz Truss ended in October 2022 after her package of unfunded tax cuts roiled financial markets, drove down the value of the pound and sent borrowing costs soaring.
Luke Hickmore, an investment director at Aberdeen Investments, said the bond market is the “ultimate reality check” for budget policy.
“If investors lose faith, the cost of borrowing rises sharply, and political leaders have little choice but to change course,” he said.
Mixed pre-budget signals
The government has ruled out public spending cuts of the kind seen during 14 years of Conservative government, and its attempts to cut Britain’s huge welfare bill have been stymied by Labour lawmakers.
That leaves tax increases as the government’s main revenue-raising option.
“We’re very much not in the position that Rachel Reeves hoped to be in,” said Jill Rutter, a senior fellow at the Institute for Government think tank.
Instead of an economy that has “sparked into life,” enabling higher spending and lower taxes, Rutter said Reeves must decide whether “to fill a big fiscal black hole with tax increases or spending cuts.”
The budget comes after weeks of messy mixed messaging that saw Reeves signal she would raise income tax rates – breaking a key election promise – before hastily reversing course.
In a Nov. 4 speech, Reeves laid the groundwork for income tax hikes by arguing that the economy is sicker and the global outlook worse than the government knew when it took office.
After an outcry among Labour lawmakers, and a better-than-expected update on the public finances, the government signaled it preferred a smorgasbord of smaller revenue-raising measures such as a “mansion tax” on expensive homes and a pay-per-mile tax for electric vehicle drivers.
The government will try to ease the sting with sweeteners including an above-inflation boost to pension payments for millions of retirees and a freeze on train fares.
Critics say more taxes on employees and businesses, following tax hikes on businesses in last year’s budget, will push the economy further into a low-growth doom loop.
Patrick Diamond, professor in public policy at Queen Mary University of London, said satisfying both markets and voters is difficult.
“You can give markets confidence, but that probably means raising taxes, which is very unpopular with voters,” he said. “On the other hand, you can give voters confidence by trying to minimize the impact of tax rises, but that makes markets nervous because they feel that the government doesn’t have a clear fiscal plan.”
High stakes for Reeves and Starmer
The budget comes as Starmer is facing mounting concern from Labour lawmakers over his dire poll ratings. Opinion polls consistently put Labour well behind the hard-right Reform UK party led by Nigel Farage.
The prime minister’s office sparked a flurry of speculation earlier this month by preemptively telling news outlets that Starmer would fight any challenge to his leadership. What looked like an attempt to strengthen Starmer’s authority backfired. The reports set off jitters verging on panic among Labour lawmakers, who fear the party is heading for a big defeat at the next election.
That election does not have to be held until 2029, and the government continues to hope that its economic measures will spur higher growth and ease financial pressures.
But analysts say a misfiring budget could be another nail in the coffin of Starmer’s government.
“Both Starmer and Reeves are really unpopular,” Rutter said. “They may be hanging on for now, but I don’t think people will be giving you great odds that they’ll necessarily last the course of the Parliament,” which runs until the next election.
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Opinion | British Labour’s Fiscal Mess
Britain’s stock and bond markets flopped Friday morning on new evidence that the country’s Labour Party leadership doesn’t have a clue what to do about the economy or budget. Add this to the list of welfare-state cautionary tales out of Europe.
At one point Friday morning, the yield on the benchmark 10-year government bond, or gilt, had risen 11 basis points to 4.55%. The main London stock index dipped nearly 2%, and the pound fell. This was in response to a Financial Times report Thursday night that Chancellor of the Exchequer Rachel Reeves is abandoning plans to increase income-tax rates in her budget plan this month.
This sounds like good news. but investors interpreted it as a sign that Ms. Reeves and her boss, Prime Minister Keir Starmer, have run out of politically viable ways to balance the government budget—which is true. Estimates of the budget “black hole” Ms. Reeves needs to fill range up to £30 billion per year—the gap between likely spending and revenue if current policies stay the same.
An attempt over the summer to cut some particularly generous welfare benefits collapsed amid a rebellion from Labour backbenchers in Parliament, putting welfare reform off the table. Mr. Starmer is rightly under pressure to increase defense spending. Labour’s promises of economic growth via public “investment” translate mainly to pay increases for government workers.
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U.K. Treasury Chief Says Lowering Inflation Will Be Budget Focus
The U.K. government’s upcoming budget will focus on lowering inflation and paving the way for the Bank of England to lower its key interest rate, treasury chief Rachel Reeves said Tuesday.
In a speech, Reeves also said the Nov. 26 budget would aim to lower the government’s debt, but also protect public services. She didn’t rule out a rise in taxes on households, which many economists see as the only option left to the government if it is to achieve its other goals.
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Paul Hannon
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Keir Starmer pitches for summit with Joe Biden ahead of 2024 elections
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LONDON — He’s embraced Bidenomics. Now, U.K. Labour leader Keir Starmer wants to meet U.S. President Joe Biden for face-to-face talks before both men head into elections next year.
The U.K. opposition leader — on course to become Britain’s next prime minister, if current polling proves correct — is seeking talks with Biden in 2024, two Labour Party officials told POLITICO. They were granted anonymity to discuss private conversations.
“David Lammy [Starmer’s shadow foreign secretary] has been tasked with making it happen,” one of the officials said. “But it’s tricky because we don’t know when the election is going to be.”
The precise date of the U.K. election will be chosen by Starmer’s opponent, Prime Minister Rishi Sunak, who indicated on Monday that it would be some time in 2024.
Lammy has emerged as a key figure in Labour’s efforts to deepen its relationship with the Biden administration. He has visited the U.S. five times in his two years as shadow foreign secretary, and prides himself on his Washington contacts — even counting former U.S. President Barack Obama as a friend.
“If I become foreign secretary, I don’t just want to build on those links, I want to bring a little bit of American energy into Britain’s foreign policy,” Lammy said. “We need to travel, make connections and share ideas at more of an American pace.”
But while polls suggest Starmer is on course for victory in 2024, Biden faces a struggle to be re-elected.
There are also questions over whether Starmer’s team is really prepared for a possible win by former U.S. President Donald Trump in 2024 — and therefore how warmly the party should embrace Biden’s economic ideas in the meantime.
Hangin’ with Joe
As the U.K. election approaches, Starmer has been keen to present himself as a prime-minister-in-waiting, lining up meetings with leaders around the globe.
So far he’s sat down with France’s Emmanuel Macron, Canada’s Justin Trudeau, Australia’s Anthony Alabanese, Brazil’s Luiz Inácio Lula da Silva and Greece’s Kyriakos Mitsotakis, among others.
Biden, however, has remained elusive — even though Labour politicians and officials have become a regular presence in Washington over the past year.
Shadow Cabinet ministers including Lammy, Rachel Reeves, John Healey, Nick Thomas-Symonds and Lisa Nandy, and top aides such as Morgan McSweeney, have all crossed the Atlantic in the past 12 months to meet senior U.S. figures.
Labour’s closeness to Biden’s administration has been likened by some to Tony Blair’s courtship of Bill Clinton’s Democrats | Anna Moneymaker via Getty Images In interviews and in private, Labour politicians stress their closeness in policy terms to the Biden administration as well as their embrace of Bidenomics — an interventionist U.S. policy characterized by robust green subsidies and a push for domestic manufacturing.
“The economic analysis — where you link foreign policy and domestic policy — is something on which there is a really, really strong sense of shared mission,” one shadow Cabinet minister said, granted anonymity to speak frankly.
They added: “The other thing which has been a real shared point is the green transition … Joe Biden has said ‘when I think climate, I think jobs, jobs jobs.’ And I think that’s very similar in terms of the approach that that we will want to take as well.”
Beyond the headline goals, key Labour figures have been talking tactics as well.
On a trip to D.C. in May, Shadow Chancellor Rachel Reeves was convinced she had to water down her pledge to invest £28 billion a year in green projects until 2030. On her return, she downgraded this to an “ambition” that Labour hoped to meet in its first term in government.
One of the Labour officials cited earlier said that Democrat strategists had advised them to “make yourself as small [a target] as possible” by addressing any political weaknesses well ahead of the election — and that the decision to dilute the £28 billion pledge was part of that strategy. The governing Tories have used the huge spending commitment as a regular attack line against Labour.
Labour’s closeness to Biden’s administration has been likened by some to Tony Blair’s courtship of Bill Clinton’s Democrats in the run-up to the 1997 general election and the 1996 presidential run in the U.S.
Yet that proximity presents Starmer and Reeves with a problem: “If the electorate rejects [Bidenomics] in America, that puts them in a difficult position,” former Starmer aide Chris Ward told POLITICO’s Westminster Insider podcast.
“Does that mean Starmer and Reeves now suddenly say, ‘actually, do you know what? That kind of approach isn’t the right one?’”
Trumped by Trump?
Labour’s embrace of Biden also raises questions about the party’s preparedness for a Trump victory in November 2024.
Starmer told POLITICO’s Power Play podcast in September that a Trump win would not be his “desired outcome.” He later told the BBC he would have to make the relationship work if Trump did become president.
But Labour’s recent internal split over a cease-fire in Gaza demonstrates how foreign policy issues can throw up difficulties for the center-left party.
While polls suggest Starmer is on course for victory in 2024, Biden faces a struggle to be re-elected | Leon Neal/Getty Images Asked about the prospect of a Trump victory, Starmer’s Shadow Climate Secretary Ed Miliband told guests at a private event in November that he simply hoped it wouldn’t happen, according to two of those in the room. “He seemed very unwilling to even think about Trump winning,” one of the two said.
Michael Martins, a former political and economic specialist at the U.S. State Department, suggested Labour’s approach would need to evolve as the U.S. election grows near.
“Starmer has already done a lot to rebuild Labour’s credibility,” he said. “Now the party has to develop a foreign policy that is not just sticking as close to President Biden as possible.”
“If President Trump wins in 2024 — which currently seems like the most likely outcome — Starmer will have to strike a balancing act between representing U.K. interests and managing his own party. Many Labour MPs and party members will want him to [publicly] criticize Trump and his politics.”
Bridging the divide
Nevertheless, senior Labour MPs insist they’re building links with American politicians on all sides, and would be ready to work with any administration.
Lammy and Shadow Defense Secretary John Healey traveled to Washington in September to meet senior American politicians, and held lengthy talks with Biden’s National Security Adviser Jake Sullivan. “He gave us a great deal of his time in a diary which normally struggles to accommodate a 5-minute meeting,” Healey said.
But Healey stressed that the broader purpose of the trip was to strengthen “Labour’s credentials as a wannabe government of Britain — not party relations with the Democrats.”
“David and I deliberately made our program bipartisan,” he said. “We met and spoke with as many Republican Senators and Congress members as we did Democrats.”
“I’m an Atlanticist who spent childhood summers with my aunt in New York, studied law at Harvard and worked as a lawyer in San Francisco,” Lammy said. “These days some of my closest political relationships, which I’ve built up over many years, are on the Hill. Not only with Democrats, but also Republicans.”
Lammy’s Republican contacts include former U.S. Secretary of State Condoleezza Rice and Nadia Schadlow, Trump’s former deputy national security adviser .
“Whoever is in charge, the U.S. remains the UK’s most important military, intelligence and nuclear relationship,” Lammy said.
Healey agreed: “The U.S. is the U.K.’s most important security ally, and vice versa. That will remain, and has survived through decades, whatever the ups and downs of the political leaderships.”
A second Trump presidency would undoubtedly test that maxim.
Eleni Courea
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