Taxing times lie ahead for Labour and business

As hard sells go, Rachel Reeves’ autumn Budget will take some beating. The chancellor, her political stock dramatically reduced since taking office, is now one of the most unpopular politicians in Britain. Having come into office promising change and wealth creation, her first year was dominated by steep tax rises, a disastrous package of welfare cuts that was ultimately abandoned and a tone of unremitting gloom about the nation’s finances.

Now, Reeves is trying to reset. She has adjusted her pitch, made a much more boosterish argument and returned to the pro-growth message that helped deliver Labour’s election victory.

The trouble is that the fiscal reality does not allow room for such a Damascene conversion. Economists believe that the black hole in the public finances by the time of the Budget will be as much as £41bn. There is mounting concern in the Treasury that a productivity review by the Office for Budget Responsibility, the official forecaster, could see a further downgrade in forecasts ahead of the Budget. There is no escape from the brutal fiscal reality facing Reeves.

Given that there will be no further changes to the government’s plans for public spending – Reeves closed the envelope in the spending review and has no plans to reopen it after a bruising round of negotiations with ministers – the lion’s share of the black hole will have to be filled by tax rises.

Where the money will come from remains to be seen. Reeves is in many ways the author of her own misfortune. In a bid to bullet-proof Labour’s chances ahead of the last election, Reeves said she would not increase income tax, VAT or national insurance.

The manifesto also included a pledge not to increase taxes on “working people”, who Sir Keir Starmer subsequently defined as those who are unable to write a cheque to get themselves out of financial difficulties. Add to these constraints the chancellor’s “iron-clad” commitment to her fiscal rules and that there are only so many tax levers left.

Top of the list is property taxes. Reeves is looking at several variations of a mansion tax, from hitting the owners of expensive homes with capital gains tax to an entirely new levy. She’s also looking at making the inheritance tax system less generous and weighing up a tax raid on pensioners.

The headlines will be unavoidable and Reeves is already saying, once again, that she will be honest about the difficult decisions to come. Each tax rise comes with its own risks. A mansion tax could stymie the housing market and lead to accusations that she is deploying the politics of envy.

Anything that impacts on pensioners or people looking to pass on their wealth is politically toxic. There are, as one Treasury official acknowledged, no good options. But at the same time the chancellor is trying to find a positive way to sell her Budget and her vision for the economy.

She will say that she wants to reward “contribution”, so that those who work hard and pay their taxes are rewarded. Reeves believes that much of the antipathy that voters feel about mainstream parties is because the link between the contribution people make towards the state and society and what they get in return has been broken.

She is particularly exercised by some of the cliff edges in the tax system, such as the effective rate of 60 per cent that those earning over £100,000 face as they lose their tax-free personal allowance. She has ordered regulators to be more creative in coming forward with measures to help people get on in life and bolster growth, such as making it easier for young people to take out mortgages.

A second planning bill is in the works that would strip back environmental protections to bolster the economy and speed up infrastructure projects. The bill would represent a reprisal of her “war on bats and newts”, and make it harder for concerns about nature to stop development.

The message from Reeves will be that in difficult times she is on your side. Voters, however, are far from convinced. According to YouGov she has a net favourability rating of -42, making her the most unpopular leading politician in the country by some margin.

Given Starmer’s unequivocal commitment to her future (he said that Reeves will remain his chancellor for years to come after she cried in the Commons earlier this year), Reeves is going nowhere soon. But the concern of many Labour MPs is that she is no longer capable of shifting the narrative. That the woman who was pivotal in their election victory has become a liability in office.

Starmer will head to Labour’s conference in Liverpool with promises of national renewal. His first year in office has been marked by contrasts. At home there has been turmoil: a disastrous slide in the polls amid a succession of U-turns and mass rebellions. But abroad has been a very different story, with Starmer’s allies arguing that he has succeeded in establishing himself as an international statesman.

There is hope in No 10 that those successes abroad – in securing trade deals with the US, the EU and India, in resetting relations with Europe, in establishing what appears to be a genuine friendship with US president Donald Trump – will rub off on the domestic front.

But one does not necessarily beget the other. Focus groups suggest that the amount of time Starmer is spending abroad has not gone unnoticed. He has clocked up more air miles than any other prime minister this century. Some have taken to describing him as “never here Keir”.

The challenge for Starmer is that the core issues that voters care about – especially the economy and migration – show little sign of improvement. Indeed, the small boats crisis, with record numbers arriving in the UK, is worsening. Inflation and the cost of living are rising. For all the prime minister’s talk of change, as Parliament returns, there is little evidence of it so far. A challenging winter awaits.