Rachel Reeves has been accused of misleading the public on the state of the country’s finances to justify £26bn worth of tax hikes in her Budget.
There had been dire warnings that the chancellor faced a £20bn black hole, and in an extraordinary speech on 4 November, she signalled higher taxes were likely, blaming Donald Trump’s tariff war and the budget watchdog’s expected downgrade of economic productivity for the “hard choices” she would be forced to make.
But it has now emerged that Ms Reeves’s comments came days after the Office for Budget Responsibility (OBR) told her the economic picture had significantly improved and that, instead of a deficit, she had a surplus of £4.2bn.
Tory leader Kemi Badenoch called for the chancellor, whose Budget was seen as make-or-break for her political future, to be sacked, saying she had “lied to the public to justify record tax hikes” and was “bribing Labour MPs to save her own skin”.
Downing Street denied Ms Reeves had misled the public and the markets. “I don’t accept that,” the prime minister’s official spokesperson said.
But Paul Johnson, a former head of the Institute for Fiscal Studies (IFS), said: “I think it [her November 4 press conference] probably was misleading.”
He said her words were “clearly intended” to confirm what independent forecasters such as the National Institute of Economic and Social Research (Niesr) had been saying, after it predicted Ms Reeves would have to fill a multi-billion-pound black hole in the nation’s finances.
Mr Johnson said the speech was “designed to confirm a narrative that there was a fiscal black hole that needed to be filled with significant tax rises. In fact, as she knew at the time, no such hole existed”.
The row comes after a new letter published on Friday by the OBR to the Treasury Select Committee revealed that it told the chancellor as early as September 17 that the funding gap would be much smaller than originally thought at £2.5bn. And in October, she was told it had disappeared altogether.
When it later emerged on 13 November that Ms Reeves had ditched plans to raise income tax, Treasury sources briefed that she had decided against the move after receiving better-than-expected economic forecasts from the OBR.
However, the OBR suggested it had provided ministers with no new forecasting in November.
“No changes were made to our pre-measures forecast after October 31,” the watchdog’s letter to the Treasury Select Committee said.
Responding to the revelations, the current director of the IFS, Helen Miller, tweeted: “She [Rachel Reeves] was not handed a big fiscal repair job… Why then that odd breakfast TV speech?” Her colleague, economist Ben Zaranko, said he was “baffled” and questioned: “Was the plan to lead everyone to expect a big income tax rise, then surprise them on the day by not doing it… ?”
Shadow chancellor, Sir Mel Stride, told the Telegraph that Labour’s story “did not add up”. “It was all a smokescreen. Labour knew all along that they did not need to raise taxes and break their promises,” he said.
But Niesr deputy director Stephen Millard said Ms Reeves’ actions could be looked at both ways.
He said: “It could be argued that the chancellor misled the public, and importantly the financial markets, in the run-up to the budget — and particularly in her speech on 4 November — when she presented the fiscal position as being bleak and stressed the need for significant tax rises. However, it is equally possible that she simply wanted to prepare the public for the large tax increases in the Budget that were necessary for her to build a bigger ‘buffer’ against her fiscal rules, something that NIESR argued for in our Autumn Economic Outlook.
“If this were the case, then actually it would be important to let the markets know that she was serious about raising taxes, which the 4 November speech did. Although we feel that the £22 billion buffer is not enough – we advocated £30 billion – increasing the size of the buffer does make it less likely that the OBR’s March forecast will require a further response from her (like it did back in March of this year), allowing her to stick to her pledge of only one fiscal event next year.”
On Wednesday, Ms Reeves unveiled £26bn worth of tax hikes in what she branded a “Labour values” Budget. In moves to appease the left in her party, she announced a package of measures that included 43 separate tax rises, which, according to Sir Mel, took the tax burden in the UK to its highest level in history.
That included freezing thresholds on income tax, dragging millions more people into paying higher taxes.
The tax raid will help to pay for a £73bn increase in welfare spending following the abolition of the two-child benefit cap and after a revolt by Labour MPs over attempts to slash the benefits bill before the summer. Ms Reeves has also given herself bigger ‘headroom’ against her borrowing rules.
A Treasury spokesperson said the chancellor made her Budget choices to cut the cost of living, cut hospital waiting lists and double headroom to cut the cost of our debt.
“We take Budget security extremely seriously and believe it’s important to preserve a private space for Treasury–OBR policy and forecast discussions, so we welcome the OBR’s confirmation that this will not become usual practice,” the spokesperson added.
