Starmer will pay a heavy price for his efforts to fight off Reform

Yahoo

06-06-2025

Next week's spending review should go better for the Chancellor than widely expected – at least, in the short term.
The Treasury communications plan would normally build up to the big day by focussing on things that might get lost in the moment. So if they can pre-announce an extra £1bn for free school meals and £16bn for transport projects, that suggests there is even more good news up Rachel Reeves's sleeve. I suspect there will be reasons enough for Labour MPs to cheer on Wednesday. Together with the about-turn on the winter fuel allowance, however messy that may be, I'm sure this will get the Chancellor through the week.
The reasoning for the winter fuel change is on display in Scotland. Labour won a surprise by-election victory in Hamilton, Larkhall and Stonehouse, snatching the Scottish Parliament seat from the SNP. Not only that, but it managed to see off the threat of Reform, which surged into third place in the constituency.
The real challenge will come in the autumn. Not least because the bill for this good news will have to be paid. Voters may not then be as grateful as they might be next week when they see their taxes go up thanks to the Government's botched attempt to reform the welfare system. So these short-term wins will quickly evaporate and simply store up more political trouble for the future.
With other headwinds going against the Government, Reeves may need to find anywhere between an extra £10bn and £30bn in the next Budget. The Chancellor refused four times to rule out more tax rises this year when questioned at the CBI annual dinner this week, suggesting this is exactly what she is contemplating.
Aside from the economic damage this will do, tax rises of this magnitude will have serious political implications. First of all, it will further exacerbate Reform's overall appeal. With a general election so far away, it doesn't really matter that Reform's numbers don't add up. People like what they are saying about tax cuts funded by spending less on net zero and diversity initiatives.
With Labour poised to announce more money for net zero, Reform will argue it gives them even more cash with which to fund tax cuts. Any tax rise will therefore make this dividing line even starker.
Given the scale of revenue needed, it looks increasingly likely that the Chancellor may have to break her manifesto pledge not to raise income tax, National Insurance or value added tax (VAT), as well as keeping corporation tax at or below 25pc.
Some rises are politically more damaging than others. Faced with a choice of which promise to break, which is the most Reform-friendly option? Given that many of Reform's voters are on the economic Left, measures that hit lower-income, working people seem unlikely. So I think we can rule out income tax or National Insurance rises.
Likewise, VAT. This was one of the many tax rises that seemed to always appear on Treasury scorecards ahead of each fiscal event I was involved in. It is straightforward and raises serious revenue, with each additional percentage point resulting in around £8bn of extra tax income. George Osborne increased the standard rate of VAT to 20pc, which didn't stop the Conservatives from winning a majority at the next general election.
He hadn't promised not to do so, though – and I cannot see how this Government could target people's pockets when its main measure for economic growth is supposed to be real household disposable income. With inflation also expected to stay around 3pc for the rest of this year, anything that pushes prices up in the short term makes little sense.
Which leaves one major tax that Labour promised to leave untouched, but that no one is really talking about: corporation tax. For the avoidance of doubt I think it would be a terrible mistake to increase it. It would be the final nail in the coffin of the Government's relationship with 'big business', send a dreadful signal to international investors and represent the end of Reeves's already-crumbling growth narrative. But if you compare it to the alternatives, I can see why Sir Keir Starmer and his Chancellor may go for it.
For a start, it would be popular, even populist. Every Treasury commissioned opinion poll and focus group that I saw found overwhelming support for increasing tax on big business. It also passes the PM's payslip test and wouldn't directly hit working people in the pocket. It is lucrative too. Every percentage point increase would raise around £4bn a year. You could therefore get most, if not all the revenue you need, from one measure, avoiding the need to fight on many fronts.
Whichever tax rise they do pick, expect the Chancellor to blame 'international events'. They will no doubt be helped somewhat by the Office for Budget Responsibility, which will (rightly) take into account the impact of increased global tariffs on GDP. Whether this negative hit is sufficient to mask the impact of the actions the Government itself has taken, we will see.
By the autumn, the Government will be in damage-limitation territory. With Reform continuing to ride high in the polls, they may be tempted to find the money they need from big business rather than working people, regardless of the economic consequences. But the general election is a long way off and Starmer risks paying a heavy price if decisions he takes now to boost Labour's standing fail to sustain momentum by the time it comes around.
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