A UK minister compared Keir Starmer’s budget to “wrestling a squirrel across a minefield,” highlighting tensions within Labour’s economic strategy.
It alludes to Rachel Reeves' greatest risk, which is Labour MPs rather than the markets or large corporations. The chancellor's highly unusual speech laying the groundwork for potential income tax increases was primarily addressed to those MPs.
Downing Street insiders are talking openly about an imminent rise in income tax.
“You don’t exactly have to be a genius to have worked out we’re doing it,”
one said.
Professors and think tank veterans are providing private lectures in Economics 101, while MPs are being pampered with brunches in No. 10. Reeves has been attending regional small groups, primarily as a listening exercise.
It would seem unusual for an administration with such a sizable majority to be so worried about a parliamentary reaction. However, the welfare vote gave the parliamentary Labour party a taste of power.
“It’s colleagues who are having the most impact on the way the markets move,”
one minister closely involved with the budget preparations said.
“Whether it’s the two-child benefit cap or the mayor of Greater Manchester saying never mind the bond markets, it literally adds to our borrowing costs.”
“The welfare reform votes in the summer are still a massive issue for bond markets – if you read any analyst note it will still get mentioned,”
another senior adviser said.
“Before there was a headline assumption that the government has a massive majority and can do what it wants.”
However, unlike in the past, Downing Street is determined to avoid being caught off guard by a reaction this time, particularly if it plans to raise income tax in violation of its manifesto vow.
No. 10 has arranged pre-budget "economic insight sessions" for Labour MPs with economists and former ministers, such as Gregg McClymont, a former Labour MP and pensions expert; James Kirkup, a former director of the Social Market Foundation; and Kitty Ussher, a former Treasury minister under Gordon Brown. They have emphasized how serious the Office for Budget Responsibility's productivity downgrading and growing borrowing costs are.
The majority of frontbenchers and cabinet ministers told the Guardian they were resigned to a potential manifesto violation.
Some members of the cabinet and Downing Street are still against an increase in income tax, but they seem to have lost.
“There is no worse signal we can send the markets – it shows yet again we have been held hostage by our party,”
one Labour veteran said.
One peculiar feature of Reeves' proposed income tax increase later this month is that its most vocal supporters have come from Downing Street rather than the Treasury. The prime minister and chancellor's advisors get together once a week to discuss the content of Reeves' speech.
The "budget board" is a change from traditional budgets, which are made behind closed doors by Treasury officials and frequently only revealed to the prime minister at the last minute. Giving the prime minister assurance regarding his chancellor's plans and strengthening his relationship with him are the goals.
“Last year, the Treasury spent much of its planning time polling various measures to death,”
said one senior government official.
“That meant the budget got an OK reception immediately afterwards, but in the long term, it fell apart. That’s what we want to avoid.”
Another senior official said:
“One of the reasons we had the disaster with winter fuel payments is that Downing Street was only brought into that decision at late notice, and they didn’t have time to scrutinise it properly. We’re determined to make sure that never happens again.”
Starmer's main economic advisor, Minouche Shafik, and Treasury Minister Torsten Bell co-chair the board. The prime minister's chief secretary, Darren Jones; chief of staff, Morgan McSweeney; director of communications, Tim Allan; business adviser, Varun Chandra; and chief of staff, Reeves, Ben Nunn, are among the others.
Every choice is sent into an online dashboard that displays the financial and public consequences. Distributional analyses, which demonstrate how each metric affects individuals differently, are given special attention by the team.
Relief on energy bills is another area that No. 10 has championed more than the Treasury. This week, the Guardian disclosed that the chancellor is preparing a multibillion-dollar package of VAT reductions.