Markets decided early on Friday to punish UK government debt and the pound harshly as yet another U-turn by Labor Prime Minister Keir Starmer and his economic team. A government that acts with fear and insecurity receives blows from all sides and, as much as Starmer wants to disguise his constant rectifications as an example of common sense, the markets have interpreted that what he transmits is indecision and opportunism.
The latest move by Downing Street, reported on Thursday evening by the newspaper Financial times (FT), was the decision to backtrack on the announced increase in income tax for the middle and upper classes. Economy Minister Rachel Reeves put forward this tax increase in a speech last week. It was an apparently courageous decision, which broke the initial electoral promise of not increasing the tax burden, but which was applauded by experts as a necessary response to alleviate the current imbalance in public finances of almost 34 billion euros.
In the end, the growing unpopularity of Starmer and his executive, indicated by all the polls, and the nervousness in the face of the drums of rebellion within the Labor parliamentary group – real or imagined, because none have yet materialized – caused once again another turning point and the resulting crisis.
Sources from the Office for Budget Responsibility (OBR) cited by the FT assure that the Ministry of Economy has conveyed its change of plans to the organization through what is technically called “presentation of relevant measures”, as a previous and mandatory step before announcing the next budget on November 26. The ministry did not want to confirm or deny this information.
The OBR is the independent body that oversees and analyzes the feasibility and consequences of economic decisions made by government. Its verdict, announced almost simultaneously with the drafting of the budgets, provides a seal of credibility or generates reasonable doubts about the public finances.
The sources cited confirm that Minister Reeves has decided not to pursue a proposal – the tax increase – developed at the time by the economic analysis center Resolution Foundationvery close to the Labor government, and named Two Up Two Down.
It involved increasing the tax brackets on medium and high incomes by two percentage points (which the Labor Party had promised not to touch in its electoral programme) and reducing the social security contributions paid by employees by another two points (in British tax jargon, the national insurance). The result meant, in theory, that the working classes would remain as they were, but in the tax balance the collection would increase considerably.
In Reeves’ final proposal delivered to the OBR, the decision to backtrack on that increase is counterbalanced by a miscellany of patches that do not convince experts, and which include raising the cap of some tax brackets to raise incomes, as well as increasing the gaming and betting tax or the property tax on luxury properties.
Faced with the unrest unleashed, the government explained that its adjustment responded to a clear improvement in the OBR’s own forecasts, which reduced the alleged hole in the accounts by almost 15,000 million euros. By mid-morning the markets calmed down slightly and government bonds regained strength. The doubts, however, have not been completely dispelled.
“Without the income tax increase, the rest of the measures included in that package aimed at rebalancing public finances are much less credible,” summed up Lee Hardman, chief analyst at the financial institution MUFG. “The government gives the impression that it wants to prioritize its own popularity and domestic political stability over fiscal stability,” he noted.
Reeves, much questioned within the Labor parliamentary group and within the party itself for her apparent iron hand in protecting fiscal orthodoxy, which has resulted in social cuts and doses of austerity, is increasingly weak, despite the Prime Minister having publicly pledged to keep her in office until the end of her mandate. Last July, cameras showed her crying in the House of Commons as Starmer tried to defend her from attacks from within her own ranks.
All this has translated into growing insecurity, with continuous steps backwards compared to previously announced measures, both in terms of cuts and tax increases.
The internal threat
As always happens when the direction is unclear in the midst of a storm, Starmer’s team have dedicated themselves all week to chasing away supposed ghosts and trying to repair the damage of a goal scored in an own goal. Several media outlets reported the leak, which they said came from the prime minister’s entourage, that Downing Street was prepared to face an alleged challenge to its boss’s leadership. Starmer would fight, they said. And they indicated the Health Minister, Wes Streeting, who is increasingly appreciated by Labor as the future head of government, as the leader of the alleged conspirators.
The minister’s response was a series of interviews on several television and radio stations in which he denied being part of the conspiracy and, at the same time, showed a political dignity and skill that elevated his position. Meanwhile, Starmer was forced to apologize to Streeting, publicly condemn the leak and try to calm things down.
Faced with a delicate issue such as public finances and restless markets, the Government finds itself in the unpleasant situation of having its hands tied when it comes to correcting its mistakes. “We cannot comment on speculation about possible tax changes,” a spokesperson for the Ministry of Economy simply said. “The minister will present a budget that will contain the right measures to build solid foundations that secure the future of the United Kingdom,” he added, in a response that appears to have the sole aim of getting out of trouble.
Starmer has managed, in fifteen months at the helm of Downing Street, to show his vulnerability to voters, who have seen no apparent change; to members of his party, disappointed by the lack of determination and the few left-wing policies; and now to the markets, which have begun to smell of blood.
