Why Rachel Reeves won’t raise income tax

Good morning. If it feels like Budget speculation has been percolating for months, that’s because it has.

Back in the dog days of the August recess, I remember us reporting on Rachel Reeves’ and the Treasury’s early thinking, with an emphasis on “improving equity and fairness” in return for (largely unspecified) tax increases.

I also remember thinking at the time “if that’s all they’ve got, then jeez, they’re in serious trouble”. Because no one remembers the nice words in a budget. They only remember if their taxes go up or down. Or if promises are kept or broken.

With the Budget hype-cycle now reaching its peak, and plenty of indications that Reeves is rolling the pitch (with more nice words) for a manifesto-busting increase in income tax, I’ve decided to cut through the noise and waffle.

Chips on the table, let’s make a bet.

Rachel Reeves won’t raise income taxes

Now this is just my view. If you run an investment fund, or are even just someone wondering how best to manage your personal finances, do not take my word on this. It is not based on some secret squirrel briefing from HMT.

If it were, it would be on the front page of the FT — not emailed to Stephen’s lovely readers, no matter how great you all are. It’s a view. Possibly the wrong one.

But let me explain my thinking.

Reeves sure sounds like she might raise income taxes — saying this week that she would put the “national interest” ahead of political expediency. And forecasts for the public finances are a bit of a mess (and it doesn’t matter if you think raising taxes is the best way to fix that or not. The point is Labour generally does).

Reeves, however, must know that breaking a manifesto promise of this magnitude is never something to be taken lightly.

Boxed in by the bond market and her own fiscal rules, plus an inability to get backbench Labour MPs to support curbing spending, she will have to raise taxes one way or another.

But if they can find a way to plug the sizeable fiscal gap — estimated at between £20bn-£30bn — using the so-called “smorgasbord” approach, it will be the route taken.

Freezing tax bands, higher council taxes, capital gains exit taxes, higher gambling taxes and other measures can, when combined, get Reeves within touching distance of her goal. All of these are painful for a chancellor to push through, and could still tarnish the government — and the broader economy.

But none of them carry the irrevocable taint of going back on the pledge not to raise income tax, VAT or National Insurance. Doing so would not just be political suicide for Reeves, but quite possibly for this government too. (You can hear my colleagues Stephen, George Parker, Sam Fleming and Robert Shrimsley give their take on the manifesto-breaking question on last week’s Political Fix).

No matter how much Reeves dresses the move up as acting in the national interest, she will be pilloried by the press. It was not just a throwaway comment, but a central pledge in the party’s offer to voters. You might think it was an ill-judged promise that should never have been made in the first place. But make it they did.

Even if economic growth accelerates and Labour can drive meaningful improvement in public services in the next three and a half years, an already desperately unpopular government would find the stain of dishonesty hard to shift.

Labour’s grand electoral strategy for 2029, of winning a straight fight against Nigel Farage by rallying centrist and left-leaning voters against Reform UK, might struggle to get off the ground. Farage bellowing “liar” at every turn might make for an unedifying spectacle, but he would not be alone.

Even if Reeves imagines history might remember her fondly for making a bold choice against her personal interests, she must know there’s an equal chance that her name goes down as the chancellor who helped usher Farage into Downing Street.

Telling voters “look, I didn’t raise income taxes, despite the speculation” may also help sweeten the medicine of the other increases. Hinting about it beforehand may also focus the minds of fiscally incontinent backbenchers.

So that’s my view. Reeves won’t raise income taxes. If I’m wrong we’ll find out on November 26 — three long weeks away.

Now try this

My team, Heart of Midlothian, are making headlines by threatening to disrupt the 40-year duopoly over Scottish league football by Rangers and Celtic.

The last time another team won the top title was 1984/85, when Aberdeen FC were managed by a certain Alex Ferguson. My first real footballing memory is hearing Hearts had lost the title on the final day of the 1985/86 season, in excruciating circumstances. I like to think of it as character building.

We’re only a quarter of the way through the season, so it would be daft to get carried away. But as well as topping the Scottish league, fans have also come up with one of the finest terrace songs in decades, in praise of new striker Cláudio Braga, to some viral acclaim.

Do click if you like Queen. Don’t click if you’re susceptible to earworms — I’ve been whistling it for weeks.

Top stories today

• Coming down the track for EVs | Rachel Reeves is expected to unveil plans for per mile road charges for drivers of electric cars at the Budget, as she looks to offset a forecast sharp fall in fuel taxes, according to people familiar with the matter.

• City cheer | The chancellor is set to spare Britain’s banks from a punitive Budget tax raid. Sources close to the process say Reeves wants the sector to remain competitive and able to support the country’s growth.

• ‘Borrowing too much’ | A former Tory minister and top bank executive have contributed to a Reform UK affiliated think-tank report that claims the UK is heading for a debt crisis, as Nigel Farage’s party seeks to bolster its standing in the City.

• Mistakenly freed | UK police are searching for two men accidentally released from the same prison, including one who was identified as overstaying his visa more than five years ago.

• London schools hit hard | Enough primary school places to fill about 23,000 classrooms were left empty across England last year, the highest level since records began, according to a report by the Institute for Government.