11/11/2025
I am not sure I agree!
“This useless Government may Not last until 2029
Jeremy Warner
Associate Editor
Turkeys don’t vote for Christmas, so however uncomfortable they might be with government policy, it seems unlikely that backbench Labour MPs would ever rebel in sufficient numbers to bring the Government down.
On current polling, many of them would lose their seats if an election were held tomorrow; sucking it up is presumably always going to be preferable to being out of a job.
The strong likelihood is therefore that some form of Labour government will stagger on until the law requires an election in early July 2029, though possibly not under the current leadership.
Even so, politics is an unpredictable business, and one can at least begin to conceive of circumstances where Labour might be forced out of power before then.
This is because almost any reform that is remotely unpalatable to the party membership is quickly abandoned once backbenchers get their teeth into it.
We have already seen this happen with the winter fuel allowance and the welfare reform bill. In both cases, the Government backed off in the face of backbench rebellion.
The next big test is going to be the mooted increase in income tax. However, this is dressed up – for instance, by partly mitigating the effect on the working population with a matching cut in National Insurance contributions – it will be an overt breach of manifesto commitments.
Whether justified or not by harsh economic and fiscal realities, this is going to be an extremely hard pill for many backbenchers – as well as some members of the Government – to swallow.
That’s presumably why Rachel Reeves held a press conference last week, which heavily promoted the idea as the most effective way of patching up the public finances. In part, she was simply testing the waters.
The response was immediate. Lucy Powell, the Labour Party’s new deputy leader, was explicit, telling BBC 5 Live: “We should be following through on our manifesto, of course. There’s no question about that ... It’s really important we stand by the promises that we were elected on and that we do what we said we would do.”
She later rowed back a little on her remarks, but was then echoed by Lisa Nandy, the Culture Secretary. “Look, we take our promises very, very seriously and we did make specific commitments around tax in the manifesto,” she said in an interview at the weekend. “I agree with Lucy Powell that promises matter.”
Many backbenchers think the same. The problem the Chancellor has created for herself is that markets now overwhelmingly believe that this is both what the Chancellor should be doing and indeed is going to do. She has virtually said as much.
If she doesn’t go through with it, and instead resorts to a hotchpotch of growth-destructive alternatives to fill the hole in the public finances, then she potentially has the beginnings of a fiscal crisis on her hands.
I don’t want to draw too much of a parallel with the International Monetary Fund (IMF) bailout of 1976, because the circumstances today are completely different.
But there is a sense in which Denis Healey, the chancellor of the day, used the conditionality of the IMF loan to drive through otherwise unpalatable austerity measures that backbenchers and trade unions had previously resisted.
Healey was later to blame the Treasury for overstating the mess the public finances were in, but the point remains. Labour doesn’t willingly do austerity, even when the markets demand it.
Chart
One thing is for sure: Reeves has to be absolutely certain of her ground before she announces a big rise in income tax. If markets sense the possibility of defeat, then we’ll see risk premia spike upwards and the pound in serious trouble.
Outright defeat would admittedly require a monumental backbench rebellion of an order that doesn’t look at all likely.
At 148 seats, Labour’s majority is an imposing one. At least half that number would have to vote against the Government to block the finance bill. All the same, market confidence in UK fiscal sustainability has rarely been as fragile as it is now, and even a smaller rebellion might inflict serious damage.
What markets fear most is government paralysis. And the more you see of this spectacularly useless Government, the more paralysed it seems to be. As Lord Lamont said of Sir John Major, it seems to be in office but not in power.
In any case, by in effect raising the possibility of an income tax rise as the solution to the Government’s fiscal travails, the Chancellor has set herself up for a caning by bond market vigilantes should she fail to deliver one. This is likely to be the case even if she finds alternative ways of satisfying her “ironclad” fiscal rules.
As the Chancellor herself seems to have acknowledged, a rise in income tax is much the most effective way of doing it. All other paths are fraught with difficulty, including the obvious alternative of cutting spending, which is even less likely to win approval from the party faithful than a manifesto-breaching increase in income tax.
Markets would quickly conclude that any such approach couldn’t possibly succeed, and punish the Chancellor with higher interest rates accordingly. For Reeves, then, the choice is between the devil in the form of an income tax rise and the deep blue sea of mayhem in the markets.
We are told that she favours the approach proposed by the Left-leaning Resolution Foundation think tank, which is to pretend that this is not a tax rise for “working people” by offsetting any increase in income tax with a matching decrease in National Insurance.
The effect would be to load the burden of any increase in income tax onto pensioners, higher earners and the self-employed, all of whom either pay no National Insurance at all or a reduced rate on some proportion of their income.
But I’m not sure this is going to satisfy markets either, in that it considerably reduces the net amount raised, and therefore calls into question whether it is actually worth the political grief of breaking such a key manifesto promise for such a relatively small revenue gain.
Chart
Be that as it may, the brutal truth is that the Government is not going to make much, if any, headway in righting the public finances until it either gets a grip on spending or it raises more money from workers across the board. You can only go so far with soak-the-rich policies.
As it is, the proportion of median earnings the Government raises in direct taxes is both close to a postwar low, and is also one of the lowest in the OECD. Even so, the Government is spending more than ever. The two are incompatible, yet Labour seems unable to do anything about it.
Logically, this paralysis must end in a fiscal and/or sterling crisis. And this might be enough to topple even a government with as big a majority as this one.
