Rachel Reeves must think big to fund Labour's ‘battle-ready' Britain. Tweaks and tinkering won't do
Who in their right mind would want to be Rachel Reeves right now? Her spending review out next week will feel like austerity all over again. Even if, in reality, it's not a cut but more spending, as the Institute for Fiscal Studies emphasises. After an uplift in everyday spending at the budget, here comes a much-needed capital slab of £113bn. Yet whatever the numbers say, painful cuts to most things will be the story and the feeling.
If you want to try your hand, the IFS has just put its 'Be the Chancellor' gadget up on its site. Strap yourself into Reeves's fiscal straitjacket and attempt a Houdini-like escape, as you decide on levels of borrowing, taxing, spending and debt. One thing it illuminates is how much even mere slivers of growth improve your position immensely. How far can you go? The febrile market meltdown point is unknowable, but Liz Truss was a useful crash dummy testing squillions on tax cuts without raising revenue. Donald Trump, plunging into an unexplored fiscal wilderness, beat a retreat when his monster tariffs sent the markets charging back out at him. He seems to be having another try.
One reason not to want to be chancellor is that Reeves inherited public services and the economy in their worst state in recent memory. The £22bn black hole was a fraction of the true deficit, as every minister soon revealed the bleeding stumps of their stricken department after years of cuts. How do you weigh up hungry children, inadequate home insulation, councils bankrupted by social care and special educational needs funding, meagre social housing, and stretched policing and courts? None will get enough, some will get cut.
These choices are the breath of politics: no wonder Labour MPs look so drawn, Survation finding 65% of them think the government should change course on fiscal policy to fund public investment and spending. At the weekend Compass conference, Labour's soft left keened over vacillations and slow progress.
At the same time, Starmer's commitment to be 'battle-ready' means huge defence spending. Monday's strategic defence review commits not just to defending Nato countries facing imminent danger from Vladimir Putin, but rebinding us to the Europe we walked out on. It means defending our own endangered undersea cables, vulnerable internet and critical facilities. It's 'a new era', Keir Starmer said. 'The world has changed.' Yes, indeed. And so must the government on tax and spending.
More revenue must be raised, and the answer is not more tweaks. The whole tax and spending ship is an unseaworthy rustbucket encrusted with barnacles, in need not of a lick of paint but of stripping down and rebuilding. Adjustments seeking small sums deliver maximum political pain, and minimal financial gain. Tempting tax loopholes turned out to be strewn with political landmines: farmers sitting on undertaxed millions in land wealth, or well-off pensioners in no need of winter fuel allowances are explosive when set off. (It turns out the cost of poor pensioners rushing to claim pension credit for the first time is outweighing the £1.5bn savings: good news but not for the Treasury.) Assuaging the wrath of more than 100 rebellious Labour MPs will blunt the savings from disability cuts. These one-offs have not been worth the row.
Helen Miller, incoming director of the IFS, suggests to me that tackling the big questions would be a better approach. She's right. Labour may as well grasp worthwhile reform, since the poison press and social media assaults them just as brutally over small things.
Here's a truly difficult example: Miller would end VAT reliefs for food, books and children's clothes, which benefit the rich as they spend most. That brings in a stonking £100bn. After more than compensating those on lower incomes with universal credit and raising income tax thresholds for middle earners, that would buy a complete Sure Start programme and more.
Start again on property tax: revaluing council tax so a Blackpool semi no longer pays more than Buckingham Palace, with a land value tax where there is no penalty for housebuilding and no escape from taxing ground value, no stamp duty to hinder movement.
The other great question she raises is health costs. The Department of Health and Social Care takes around 40% of day-to-day spending, the majority of that on the NHS. It's dangerous to ask if we need every new drug and treatment. The NHS draws cash away from underfunded education, yet we never dare discuss this clash of interests. Older people use the NHS most: 32% of the spend is on those aged between 65 and 84 (16% of the population) with another 10% on over-85s (3% of the population), according to Full Fact. Yet the future depends on better early years, great schools, further education colleges, skills and apprenticeships.
Investing in human capital brings longer-lasting national growth than bricks and mortar, as education and skills are passed for ever down the generations. But the Treasury green book says no.
Wealth tax is not as difficult as claimed: Liam Byrne's book Inequality of Wealth shows the top 1% have multiplied their wealth by 31 times more than the other 99% since 2010. Arun Advani, director of the Centre for the Analysis of Taxation, says a tax on assets of 1% from those with more than £10m would yield £10bn, which would nicely eliminate the worst poverty: End Child Poverty this week reports one in three children in the UK are living in poverty. Making all forms of income pay the same tax, earned or capital gains, rents or self-employed, pays out £12bn, says the economist Prof Richard Murphy.
If ever there were a time to uproot old habits, it's now. The defence review demands more contribution. If money isn't raised elsewhere, defence risks eating into everything. 'Change' was why Labour got elected, but voters don't see or feel it, and nor do hang-dog Labour MPs. The fiscal straitjacket has come to be a signal to voters, indicating 'no change'. Yet the Institute for Government points out the rules permit Reeves to suspend them 'in the event of a 'significant negative shock',' while noting 'it is at the Treasury's discretion to define what constitutes such a shock'. Her own spending review will show how Trump, tariffs and emergency defence spending cause a deeply 'negative shock' to everything else.
Labour has suffered the biggest dip in popularity within its first 10 months of any newly elected UK government in 40 years. Yet look at its opportunity for change, with four full years of government ahead and a majority it may never see again (nor should, with electoral reform). In all these things, the Labour cabinet and Labour MPs have nothing to lose but their nerve.
Polly Toynbee is a Guardian columnist
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Sky News
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