(Bloomberg) — Rachel Reeves’ first challenge when it comes to delivering a balanced UK budget by the end of the month is winning over an increasingly rebellious Labor Party.
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In 11 days, Britain’s first female Chancellor of the Exchequer will present the new government’s economic plans, including tax hikes and short-term spending cuts and long-term investment in public services as part of a £40 billion ($52 billion) fundraising campaign to restore order. -UK.
But while Reeves hopes to sell the package to bond markets and voters alike, he and Prime Minister Keir Starmer face a battle to convince cabinet members they are taking the right path in the budget statement on Oct. 30 we will set the way of their management. .
Senior ministers are rebelling about the department’s savings being required in the one-year spending review in line with the budget, while others are going over Reeves’ head to write letters of protest to the prime minister. Party officials, who asked not to be named to discuss an internal matter, said the entire Cabinet, which includes a handful of highly loyal people, was at loggerheads with the Treasury, with Deputy Prime Minister Angela Rayner at odds with Reeves over spending at least two days past Wednesday’s deadline. .
The disagreements present a new challenge to the fledgling government of Starmer, who won a landslide election victory on July 4, but has been embroiled in scandal over ministers accepting freebies and a sad story about the state of the UK economy. The test for Starmer and Reeves is to convince their restive party – which has been in opposition for 14 years – that short-term pain is necessary to deliver long-term gains and finally get re-elected in five years.
Meanwhile, the rebellion has fallen on deaf ears in Downing Street. Starmer and Reeves are united behind the need for tough and quick decisions on tax and spending to fix the economic fundamentals they got from the Conservatives, people familiar with their thinking said.
Despite the complaints of the cabinet that the reduction of the projects in 2025-26 is like a return to the crisis – the policy of reducing money followed by the Tories for the last ten years – Reeves will oppose the Conservatives who add salt to the earth by reducing taxes and baking in the reduction of public spending that is impossible in the future. a cynical attempt to deter potential Labor takeovers.
That means that in addition to seeking savings, Reeves is likely to raise estate and capital gains taxes, raise the corporate income tax, end the gas tax freeze, and raise so-called sin taxes on things like alcohol and smoking, people familiar with the matter said. Other initiatives include the introduction of election promises to raise taxes on wealthy foreign nationals, foreign property buyers, private fund managers and private schools.
The planned changes to the credit rating that inform Reeves’ fiscal rules will allow him to borrow tens of billions more for capital spending. Bloomberg Economics estimates that Reeves is likely to increase borrowing by £25 billion and raise £32 billion through tax increases and spending cuts.
Still, the basic message of the budget will be positive, focusing on major infrastructure improvements in the medium term, the people said. A Labor chief said ministers were shocked by reports on Friday that Reeves was considering a freeze on income tax, which they said broke the party’s campaign pledge not to raise taxes on “working people.” Ask them why Reeves favors this measure over higher wealth taxes.
Reeves informed banks and bond investors about the plan and received encouragement that they would not react negatively, the people said. That is supported by Goldman Sachs Group Inc. and Amundi SA increasingly favors UK bonds, betting Reeves will not repeat the mistakes of former prime minister Liz Truss in 2022.
Convincing the public that he is taking the right course is another matter, especially if he cannot win the cabinet. With the National Health Department prioritized for any available funding, ministers have complained that the Finance Ministry wants them to cancel plans to build new roads, repair crumbling public buildings, improve flood defenses, and upgrade key IT systems, the people said.
One official said Reeves was at odds with his team about what it meant to avoid pressure. To the Chancellor, it means not reducing the actual goals in the departments, but the ministers say they cannot stand and face the violation of public needs.
“Resolving the Cabinet’s issues about what is and isn’t repression will be important not only to sell the budget, but to maintain Cabinet and party unity,” said Stewart Wood, a Labor peer and former adviser to former Prime Minister Gordon Brown.
Some ministers unhappy with their 2025-26 allocations are guaranteed a big spending injection in the next three-year spending review. Others refuse to sign the Treasury’s proposals. In their frustration, some ministers have even suggested privately that they would resign rather than accept the cuts, although that appears to Number 10 as an empty threat.
Reeves’ message is that there is no money now to pay for their demands. Some ministers privately oppose that because the chancellor is committed to financial cooperation after he vowed not to borrow to finance daily spending and decided to increase the three collectors of the Ministry of Finance during the general election campaign: income tax, the whole country. insurance and value-added tax.
Others think the chancellor should withdraw those commitments, reverse cuts to national insurance made by his predecessor Jeremy Hunt, raise more taxes on wealth and increase borrowing – accusing the Tories of breaking Labor manifesto promises.
The No. 10 official described the idea as absurd, insisting that Reeves was already pushing it in a way that he felt he could raise taxes and borrow without destroying the manifesto or his fiscal rules. The cabinet needs to hold the line for now and there will be a good image ahead, said another. They suggested that ministers who don’t understand the financial situation and who seriously propose to break party promises should not be in government.
However, the Cabinet is wary that a budget that does not go down well with the electorate can leave an image that is difficult to change. One minister likened Reeves’ challenge to landing a passenger jet on a narrow runway, asking: How do you do development, investment support, social services and an anti-austerity budget while raising more taxes and cutting spending across the country. board?
In the end, Starmer and Reeves are relying on a strategy that helped them take power: steady the ship by taking tough decisions early on – as the Labor leader did by changing his party when he took office in 2020 – before broadening its appeal to the masses. voters during elections.
While the budget will not be able to escape a bad financial legacy, inflation, low interest rates and a sense of momentum from public and private investment will begin to clear the fog, said a person familiar with its contents.
One government official characterized Reeves’ approach as prioritizing the bond market over the Cabinet. When voters go to the polls in the upcoming 2029 election, they won’t remember the current lines about spending cuts, but instead reward Reeves for fixing public finances and investing in much-needed services, they said.
–Courtesy of Ellen Milligan.
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