The UK Economy Minister, Rachel Reeves, has launched a cry for help to the Labor MPs of the parliamentary group that supports the Government. This Monday brought them together to call for unity and support in defending budgets that could shake Downing Street.
Prime Minister Keir Starmer has embraced the fiscal orthodoxy of his minister, trained in the analysis department of the Bank of England, from the beginning of his political career. That rigor, which has been punctuated by inexplicable swings and unrest among Labor MPs and entrepreneurs, will be put to the test again this Wednesday, with the presentation of public accounts that have managed to unnerve the markets before knowing the details, and which for many analysts will constitute a touchstone on the future of the current Labor government. An adverse reaction, similar to that provoked by former Conservative prime minister Lizz Truss with her Budget, would be lethal for Starmer.
From the first minute of his mandate, Reeves imposed balanced budget rules that no one had demanded of him, but which the Labor group considered essential to reduce the fiscal hole of over 22 billion euros inherited from previous conservative governments.
However, all the economic measures passed so far in search of that balance have been a political headache for the minister and his boss, who have seen their popularity plummet.
The increase in social contributions paid by employers has been widely contested by the private sector. Social cuts – such as the removal of pensioners’ subsidies on electricity and gas bills or the removal of work disability support – have put a large group of Labor MPs on a war footing.
Reeves was forced to reverse many of those decisions. Her political future was thrown into doubt and she was also the protagonist of a stormy parliamentary session in which cameras caught the minister crying, under pressure from her own people and the opposition.
In a political decision he may still regret, Starmer was forced to publicly express his support for his right-hand man and pledge to keep her in her position until the end of his term.
Budget hits
The Labor Party pledged in its election manifesto 16 months ago not to raise income tax. However, the need to straighten out stubborn accounts has led Reeves to prepare markets and voters in recent weeks for a possible turnaround and tax increase.
Until last week. Anticipating a revolt by MPs that would be the straw that would break the camel’s back for Starmer, who lives with the constant threat of an internal rebellion that would remove him as prime minister, the government floated the idea that it would finally not touch that tax figure. It would try to raise the billions it needs through other tinkering.
Markets then punished this uncertainty harshly, with Treasury bonds and the pound falling. And they are preparing to do it again this Wednesday if the measures that Reeves is preparing to announce are not convincing.
The minister’s team has studied a series of measures that will increase collection by at least 10 billion pounds (approximately 11.4 billion euros). Among these is the freezing, for at least two years, of the thresholds from which the income tax bracket is raised. It’s a way to generate income in an economy where high inflation translates into higher wages.
According to information that has emerged, Reeves will also increase the property tax on houses whose value exceeds two million pounds (about 2.28 million euros), a move that the media has already dubbed “the mansion tax”.
The ministry has also leaked the idea that it could end much of the tax exemption currently enjoyed by most British workers who dedicate part of their salary to a private pension fund. Until now they did not have to pay social security contributions for the amount set aside.
Finally, Reeves’ team suggested increasing taxes on electric vehicles and sugary drinks.
In exchange for all this, the minister would launch some social hints to the left of her party, such as the elimination of the two-child limit for requesting social assistance. The current Starmer government has maintained, for fiscal convenience, a decision by previous Conservative leaders that focused protests from British progressives.
As Reeves releases details of his budgets, the Office of Budget Responsibility, which already has the information, will announce its verdict on the rigor and credibility of the accounts. The reaction of the markets, which today remain restless and waiting, will largely depend on this announcement.
And along with this financial reaction, Starmer will have to monitor politics. If the social measures do not convince some Labor MPs worried about the unpopularity of their party and its leader, the drums of internal war will once again sound on the British left.
