19 June 2025

How Labour became trapped on tax

Rachel Reeves has been left over-reliant on raising money from the wealthiest.

Back in November, Rachel Reeves was clear. Mindful of business criticism regarding her Budget, she told the CBI conference that “public services now need to live within their means” and that “I’m not coming back with more borrowing or more taxes”.

Even at the time that looked to many in Labour like a hostage to fortune. Donald Trump had been elected president just three weeks earlier, demanding higher defence spending and threatening tariffs.

The Chancellor now inhabits a changed world and so her line has changed. “Taxes won’t need to go up to pay for what is in this Spending Review,” Reeves said last week in an interview with GB News (a channel Downing Street is paying increasing attention towards). It was a carefully caveated answer: Reeves does not expect to raise taxes to pay for fixed departmental budgets but she faces other fiscal headaches: the U-turn over winter fuel payments (£1.25bn) and the likely abolition of the two-child benefit cap (£3.5bn).

This is not all: the Office for Budget Responsibility is expected next month to revise down its optimistic productivity forecasts (something that could cost Reeves £20bn) and the Chancellor is considering reversing her imposition of inheritance tax on non-doms. “The optics are awful,” remarked one Labour MP of the coincidence with the biggest welfare cuts since George Osborne.

The non-dom change, which sees individuals charged 40 per cent on their global assets (even if these are placed in trust), is being blamed for an exodus of the wealthy. There are also fears that the extension of VAT to private school fees could raise less than hoped (13,000 pupils have so far left the sector compared to an official estimate of 3,000).

Here is Reeves’ challenge: chancellors traditionally favour “broad-based” tax rises. In other words, those that are paid by most taxpayers and generate reliable revenue (such as income tax, National Insurance and VAT). But by pre-emptively ruling out such measures, Reeves has been left reliant on raising money from the wealthy and business.

Labour’s tax lock is regarded by some as the government’s “original sin” – will it ever be broken? No 10 and No 11 are united in insisting not. First, they emphasise, it is an explicit manifesto commitment (Labour, by contrast, simply avoided any mention of winter fuel payments). One Treasury minister recalls David Cameron’s refusal to abandon his pledge to protect pensioner benefits. “I’m not having one of those bloody split-screen moments,” the prime minister told aides, referring to broadcasters’ habit of juxtaposing contradictory statements.

Second, for voters, tax is a cost-of-living issue. “Increasing their taxes at this time would be extremely politically difficult,” a senior No 10 source told me. Ministers already fear the impact of an annual 5 per cent rise in council tax (which will take the average band D bill from £2,280 this year to around £2,640 by 2028-29).

Here is how Reeves became trapped on tax. Raising more from ordinary voters is viewed as politically untenable. Raising more from business and the wealthy is becoming economically unsustainable. The Chancellor’s task for the summer is to find an escape route.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here