The big mistake Labour think Nigel Farage has made - and how the chancellor hopes to capitalise

Sky News

2 days ago

Next week, the chancellor will unveil the first spending review since 2021. It will set Whitehall budgets for the remainder of this parliament and it will be a big moment for a government struggling to tell a story about what it is trying to achieve to voters.
Rachel Reeves, flanked by transport workers in a bus depot in Rochdale, knows it. She came to the North West armed with £15bn of funding for trains, trams and buses across the Midlands and the North.
Much more will be announced next week when the chancellor sets out her capital spending plans for the remainder of the parliament, having loosened her fiscal rules in the budget for capital investment.
More is coming. Next week, the chancellor is expected to announce plans to spend billions more on a new railway line between Manchester and Liverpool, as well as other transport schemes for northern towns and cities. This will be the backbone of the "Northern Arc" that Greater Manchester Mayor Andy Burnham has been arguing for as a northern version to the much-vaunted Oxford-Cambridge growth corridor.
Labour will pour £113bn into capital investment over the course of this parliament and there is an economic and political imperative for a chancellor to talk up capital spending in rail and roads, houses, power stations. On the economic side, she is in search for growth and hopes investment in infrastructure will create jobs and fire up the economy.
On the politics, Labour need to show voters in their red wall seats that it is the Starmer government and not Nigel Farage that will improve the lives of working people.
Ms Reeves spent a lot of time in her speech talking about the need to invest right across the country. She is overhauling the Treasury's "Green Book" that assesses value for money for public projects to make sure that funding decisions don't just get concentrated in the South East but are weighted to the Midlands and the North.
2:44
She also, in reiterating her commitment to her fiscal rule to not borrow to fund day-to-day government spending (the annual budgets for our schools, councils, courts, police, hospitals), sought to draw out the "choice" between Labour and Reform, as Labour seeks to capitalise on Mr Farage's decision last week to promise up to £80bn worth of new spending - including scrapping the two-child benefit cap and increasing winter fuel payments - while not explaining exactly how they could be paid for.
Expect to hear lots more from Labour in the coming weeks about how Mr Farage is an iteration of Liz Truss, ready to pursue "fantasy economics" and trash the economy.
Labour are gleeful that Mr Farage has opened up this line of attack and think it was an uncharacteristic political misstep from the Reform leader.
"Farage was a politician for vibes, now he's turned himself into a politician of policy and he didn't need to do that yet," observed one senior Labour figure.
But if that is the sell, here is the sting. While the Chancellor has loosened her fiscal rules for capital spending, she is resolute she will not do the same when it comes to day-to-day departmental spending, and next week harsh cuts are on the way for some departments, with Yvette Cooper at the Home Office, Angela Rayner at local government, and Ed Miliband at energy still wrangling over their settlements.
Ms Reeves was at pains in Rochdale to talk about the extra £190bn the government has put into day-to-day spending in this parliament in order to see off the charges of austerity as those spending cuts kick in. Her allies point to the £300bn in total Ms Reeves has poured into capital projects and public services over this parliament.
"You just can't say we aren't a tax-and-spend government," said one ally.
But this isn't just a chancellor fighting Mr Farage, she is also battling with those in her own party, under extreme pressure to loosen her fiscal rules, or tax more, as MPs - and her prime minister - demand she spends more on welfare and on getting the UK warfare-ready.
You can see it all playing out. After a local election drubbing, the chancellor U-turned on her seemingly iron-clad decision to take the winter fuel allowance away from all pensioners.
Now, I'm hearing that the prime minister is pressing to lift the two-child benefit cap (no matter his chief of staff is opposed to the idea, with the cap popular with voters) and MPs are demanding a reverse to some disability cuts (one government insider said the backbench revolt is real and could even force a defeat despite Sir Keir's whopping 165-strong working majority).
Meanwhile, the prime minister is under pressure from US President Donald Trump for NATO to lift defence spending to 3.5% of GDP.
Spending demands and rising borrowing costs, there is no wonder that attention is already moving towards possible tax rises in the Autumn budget.
Ms Rayner, the deputy prime minister, wrote to the chancellor, arguing for targeted wealth taxes. Andy Burnham, the Greater Manchester mayor, told me this week on Electoral Dysfunction that he wanted more taxes on assets and a revaluation of council tax bands so those with large, valuable homes pay more.
"We have not taxed assets and wealth properly and I'd come up with something that can be controversial but council tax has not been revalued since the early 90s so there are homes in London worth tens of millions of pounds that pay less council tax than many average properties here in Greater Manchester so I would look at reforms in that space," Mr Burnham told me this week.
"I would look further at land taxation and land taxation reform. If you put in new infrastructure, what I learned through Crossrail, Elizabeth Line - you lift the values of that land.
"So why don't we capture some of that uplift from that? I personally would go for a land value tax across the country. So there are things that you can do that I think can be seen to be fair, because we haven't taxed those things fairly.
"I've said, and I'll say it again, we've overtaxed people's work and we've undertaxed people's assets and wealth and that balance should be put more right."
I asked the chancellor on Wednesday if Ms Rayner and Mr Burnham had a point, and would she level with people that taxes might have to go up again as she struggles with spending demands and self-imposed borrowing constraints - she, of course, swerved the question and said the priority for her is to growth the economy.
These questions will, I suspect, only get louder and more frequent in the run-up to the budget should borrowing costs continue to go up alongside demands for spending.
The chancellor, at least, has a story to tell about rewiring the economy as a means to national renewal. But with the spoils of infrastructure investment perhaps decades off, Ms Reeves will find it hard to frame this spending review as a reboot for working people rather than a kicking for already stretched public services.