Time is running out for Starmer and Reeves

Rachel Reeves felt like she had done enough. This was in every sense exactly as the chancellor billed it: a Labour budget with Labour values. Higher taxes, higher welfare spending, all calibrated with one priority in mind: survival.

Sir Keir Starmer and Reeves know that time is running out. Labour’s unprecedented slump in the polls means that something that would have been unthinkable when they took office with a landslide majority is now very much a reality. Cabinet ministers believe it is now a case of when, not if, they are removed from power.

The Budget was largely aimed at two key constituencies: the 405 Labour MPs who hold the prime minister’s fate in their hands and the markets. The £30bn package of tax rises along with a vague promise of spending cuts at the end of this parliament was enough to satisfy the markets.

The giveaways – an extra £16bn worth of spending on welfare by 2030, including the abolition of the two-child benefit cap – appear to have done enough to win over Labour backbenchers for now.

But what of the voters? Reeves said in her speech that everyone would have to contribute more to help balance the books, although that wasn’t strictly true given the increase in welfare spending. Those on the lowest incomes will be better off, those on middle and higher incomes will pay.

The tax rises are everywhere. Reeves’ decision to freeze income tax bands for three years until 2030 – continuing a longstanding Tory policy – means that one in four taxpayers will be in the higher or additional rate bands by 2030.

Where once the higher rate was for the truly wealthy, it is increasingly becoming the norm, including for millions of Labour voters. The move appears to be a breach of the letter and the spirit of Labour’s manifesto, which included an explicit pledge not to increase taxes on working people.

There is a second manifesto breach in the form of a tax raid on pension contributions, which will impose national insurance on salary sacrifice schemes. The move, which will raise £4.7bn, will hit both employers and employees.

Other revenue-raisers are just as contentious. Labour has committed to a high-value property tax that is already causing chaos in the housing market, while raising just £400m. Then there’s a new pay-per-mile tax on electric cars, a tourism tax, a gambling tax, a taxi tax – the list goes on.

By some counts the Budget includes no fewer than 43 tax rises, hitting both incomes and assets. For Reeves, it again raises questions of trust and broken promises. It has gone down extraordinarily badly with voters. Polling by YouGov after the Budget found just 11 per cent of voters believe Reeves is doing a good job. Three-quarters believe the government is handling the economy badly.

But if the build-up to the Budget was chaotic, dominated by leaks and extraordinary U-turns, the day itself and the aftermath were a veritable theatre of carnage. The leaking of the entire Budget by the Office for Budget Responsibility was unprecedented and perhaps unsurprisingly ended in the resignation of Richard Hughes, its chairman. But before he quit, Hughes delivered a coup de grâce. He revealed exactly what the Treasury knew about the state of the public finances and when – before the Budget.

His brief two-page letter was devastating for Reeves and cast doubt on her entire Budget narrative. The chancellor spent months warning the public and colleagues alike that a big downgrade in the public finances was coming and taxes would have to rise.

This culminated in a Downing Street press conference on November 4, three weeks before Budget day, in which she signalled heavily that a manifesto-breaching increase in the basic rate of income tax was on its way.

The letter from Hughes revealed that she was only telling half the story. Reeves was informed on September 17 that the bulk of the downgrade in productivity forecasts was offset by increased tax revenues due to higher levels of inflation. By October 31, this modest deficit had turned into a £4.2bn surplus.

The much-touted black hole in the public finances, the OBR’s figures suggested, did not actually exist. The tax rises were needed to fund £7bn-worth of additional welfare spending and her decision to leave £22bn in headroom as a cushion against future financial shocks.

It left Reeves wide open to a simple but powerful charge that at worst she had lied, and at best she had been economical with the truth. Even her colleagues in Cabinet felt misled, with one minister describing the handling of the Budget as a “disaster from start to finish”.

Where does this leave Reeves? In the court of public opinion, she has been irrevocably damaged but will remain chancellor for two reasons. First, she and Starmer are wedded to one another. If she goes, he goes. Second, she is locked in what some economists have described as a “death embrace” with the bond markets.

Whenever her position is under threat, the cost of government borrowing increases significantly amid concerns that she will be replaced with a more left-wing alternative who is willing to rip up the financial rules.

Perversely, given the state of the polls, Reeves and Starmer are safe for now. The bar to removing them is high, with 80 Labour MPs needing to coalesce around an alternative candidate – no easy feat, given the differing tribes in the party.

But the elections in May – the local elections in England as well as elections in Scotland and Wales – are expected to be devastating and pressure will only grow as they approach. A reckoning is coming, one that Starmer and Reeves are ill-prepared for.