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Rishi Sunak plots pre-election tax trap for Labour

Rishi Sunak plots pre-election tax trap for Labour

by host

LONDON — For many in the Labour Party, the electoral equation for the next 12 months is simple.

Win the public’s trust on the economy — a perennial difficulty for Britain’s center-left party — and win the election.

The polls have certainly been looking rosy for Labour in recent months. Surveys consistently suggest the public trusts Labour to manage the economy far more than the ruling Conservative Party, after the latter presided over years of declining living standards and recent 40-year-high inflation.

However, the Conservatives may have one last weapon in the locker as they look to create clear lines of division between themselves and Keir Starmer’s party before an expected fall 2024 election.

While Prime Minister Rishi Sunak set out his legislative proposals in the King’s Speech Tuesday, ahead of Chancellor Jeremy Hunt’s Autumn Statement in just over two weeks’ time, a far more consequential parliamentary event is likely to take place within the next six months.

Insiders increasingly sense the pair will use a spring budget to announce pre-election tax cuts to ease the burden on squeezed families in a period of stagnant economic growth.

That would leave Labour in a precarious position — either accept the tax cuts and compromise on their election manifesto spending plans, or reject them and contest an election while essentially promising to hike taxes.

It’s a political trap the Conservatives will be praying Starmer and his Shadow Chancellor Rachel Reeves fall into — enabling them to pull off an unexpected victory.

It also mirrors a trap set for the Tories by the last Labour prime minister, Gordon Brown, who introduced a 50p top rate of tax for the highest earners in the run-up to the 2010 general election in a bid to wrong-foot Conservative leader David Cameron. The tax was eventually scrapped by Cameron and his chancellor, George Osborne, in 2012.

Hard choices

Hunt has made clear to backbench Tory MPs and to the revolving door of lobby groups entering No. 11 Downing Street that energy security and green investment will be the key pillars of the November 22 fiscal statement.

However, the chancellor appears to be clearing the way for a spring 2024 budget that showers the electorate with pre-election tax giveaways as the Tories seek to claw back public support. Right-wing Conservative backbenchers have become increasingly vocal on the strategic and ideological wisdom of such a move.

Britain’s inflation rate is predicted to fall through 2024 to near the Bank of England’s 2 percent target by the end of the year — something which Sunak and Hunt have repeatedly said is necessary for tax cuts, which would almost certainly prove inflationary.

Labour circles are abuzz with speculation over whether Reeves will promise to retain any new tax cuts to ward off possible Tory attacks, or whether she will defend her hard-fought reputation for fiscal rectitude.

“I understand the rationale for copying whatever tax cuts they announce, but this isn’t 1997 and we can’t go into an election copying the Tories’ economic plans,” said a backbench Labour MP given permission to speak anonymously.

“Especially because there’s a very real possibility that any tax cuts would come alongside future spending cuts.”

With both parties seeking examples overseas of how to navigate the dilemma, Labour will be alive to the events that played out in Australia’s 2022 general election, when the victorious opposition Australian Labor Party agree to copy the conservative Liberal Party’s income tax cuts.

Labor leader Anthony Albanese went on to win the election thanks to a minimalist defensive campaign that many suspect will prove very similar to what British Labour runs next year.

Starmer’s Labour Party maintains close links with Albanese’s team and is taking lessons on how to win from the Australian campaign.

A Labour shadow cabinet minister, who wished to maintain anonymous in order to speak frankly, said decisions on accepting any government tax cuts would ‘”depend on how much money is concerned and how much of a trade off it is,” but said they would have to be fully costed and not based on “unrealistic or unreasonable spending commitments.”

“We’re very much alive to the Tories wanting to use the King’s Speech and fiscal statements to place traps and create dividing lies — we’re not going to play those games this time,” they added.

Steady as she goes

Reeves has spent much of the past two years hammering home the message that Labour would maintain strict fiscal discipline if it formed the next government, after the party presented a quixotic wish list of spending plans in the 2019 election under ex-leader Jeremy Corbyn.

The shadow chancellor has created fiscal rules dictating that no day-to-day departmental spending would be funded from borrowing under a Labour government, and that the national debt would fall as a proportion of the economy.

Reeves has avoided plans to hike taxes significantly, proposing instead to raise new revenue from closing tax loopholes on entities such as private equity firms and fee-paying schools.

“Taxpayers’ money should be spent with the same care with which we spend our own money … responsibility must always come first,” Reeves told Labour’s annual conference last month.

That message has been carefully calibrated to deflect attacks from the Conservatives regarding Labour’s economic competence, which have failed to land thus far.

But one party official given permission to speak anonymously said Reeves’ stance on economic policy would leave her with nowhere to go if presented with an ultimatum on lowering taxes.

“If you asked the average person during a cost of living crisis if they want a tax cut they would obviously be very enthusiastic,” the official said.

“I think we’ll end up having to accept them and work them into our spending plans.”

Sunak and his team appear determined to run a scare campaign that paints Labour as a dishonest party that will inevitably drop a tax bombshell on the British public.

A Tory minister granted freedom to speak off the record told POLITICO that “political parties are about having a very deep-rooted purpose.”

“Do [Labour] really believe in what they’re doing after saying for years that higher taxes are moral? Political parties will always revert to their innate character,” they said.

Labour’s central economic plan is to spend up to £28 billion a year on subsidies for green infrastructure and investment — something the Tories seized on as an example of left wing profligacy.

Hunt said during his October party conference speech that “Labour can change the fiscal rules, they can dress it up as ‘responsible,’ but if they increase borrowing, they increase debt and that means higher taxes, higher mortgages and higher inflation for families.”

“That’s not an economic policy, it’s an economic illusion,” he said.

Torsten Bell, chief executive of the left-leaning Resolution Foundation think tank, noted that such rhetoric could be a difficult sell when “taxes are going up in the aggregate, not down” and that this “can’t be undone” by a headline-grabbing tax cut in the next six months.

Britain’s tax burden has risen to its highest level in decades, thanks largely to a decision to freeze the wage thresholds for income tax and a 2022 increase in national insurance contributions.

Bell added: “John Major went into the 1997 election having delivered some tax cuts, but with a backdrop of quite big tax rises during that parliament, which is worth remembering.”

Cold reality

Any trade-off Labour is forced to make magnifies some of the difficulties Starmer will have in enacting the major changes he says the country needs. According to the Institute for Fiscal Studies, the U.K.’s public finances are already in a “parlous state.”

A second Tory minister said the last Labour government was “playing on easy mode” when it entered government in 1997 because “the economy was so strong when they came into power.”

“It’s not hard to improve public services when you have a massive money bazooka to just blast cash at problems,” they added.

If Starmer wins the election, he may well find that instead of a money bazooka he inherits a jammed revolver — particularly if tax cuts are forced on him by an increasingly desperate Conservative government.

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