“It’s a package, not a pick-and-mix. You can’t say you like the cola bottles but you don’t like the fruit salad.” So said the Chancellor ahead of today’s Budget — and it doesn’t take a political genius to grasp her analogy. Yes, Rachel Reeves is set to scrap the two-child benefit cap, a move likely to remove hundreds of thousands of children from poverty. That is set to cost the Exchequer around £3 billion a year. In the background, however, the country’s debt interest payments continue to remain north of £100 billion.
Generosity is fine, the critics therefore concede, if you can afford it: but Britain no longer can. Certainly, that explains the second part of Reeves’s confected metaphor, with the Chancellor sure to offer voters plenty of less pleasant fare alongside a lifted benefit cap. Yet if this balancing act is more about politics than economics, with Reeves and her party running scared by radicals to her Left almost as much as her Right, it does little to deal with the fundamental problems of Britain’s lopsided tax system: one where median earners pay surprisingly little, and receive rather a lot in return.
Perhaps the first question to ask here is: why now? Why grapple with something as controversial as the benefit cap, especially as the Chancellor faces relentless scrutiny to find taxpayer value? And why increase welfare spending, having drawn such attention to the need to reduce it? Just 16 months ago, seven Labour rebels lost the whip after voting for an amendment calling to end the benefit cap. Then, such a position was dismissed as asinine posturing by the leadership. Now, it lies at the core of a make-or-break budget.
So what gives? Any explanation must begin with the increasingly omnipresent Zack Polanski. The Greens have polled above Labour several times, with one pollster, FindOutNow, even putting them in second place. According to a recent survey by YouGov, meanwhile, Polanski would be the next prime minister if only under 50s were eligible to vote. However readily his critics’ rebukes spring forth — such as the assertion that the Greens are only favoured by “woke” undergraduates — the fact is that Polanski is clearly galvanising much of the country’s working-age population: including much of Labour’s urban base.
If local elections earlier this year represented a national breakthrough for Reform, it is plausible that elections next May — in Scotland and Wales as well as England — offer a similar springboard for the Greens. On the doorstep right now, Labour canvassers have vanishingly little to entice their supporters, even among those willing to personally embrace higher taxes. Scrapping the two-child benefit cap immediately remedies that: it’s the political equivalent of the Bat Signal for those who voted Labour in 2024, but are now tempted by other parties of various progressive hues. In its own way, this illustrates the extent of Labour’s desperate predicament: powering the Budget are policies designed to scupper a rival fuelled by often vague commitments to anti-austerity, and which anyway has only four MPs.
But removing the two-child cap serves an ancillary function, too, because the Chancellor regards it as a downpayment for future cuts to the welfare bill. It has been consistently reported that Starmer was always more amenable to ditching the cap than Reeves, with Morgan McSweeney, his most senior adviser, aligned with the parsimonious Chancellor. What has changed is that, after failing to deliver £5 billion of welfare cuts in June, Reeves and McSweeney now view the abolition of the cap as a necessary expedient to belt-tightening elsewhere.
Reeves hinted as much when writing for The Sunday Times over the weekend, emphasising the need for welfare reform to “ensure it doesn’t pay to be off sick instead of in work”. Rather than adhere to her instincts — means-testing and egg-headed penny-pinching — the Chancellor now seemingly grasps the politics of gradualism. Ditching the cap represents a tactical retreat for Reeves. Ditching the cap represents a tactical retreat for Reeves. But as Macaulay once wrote about conservatives embracing reform to preserve what they cherish most, the Chancellor intends to increase welfare spending now only to cut it later. It’s not an incoherent strategy given the political capital the Chancellor stands to gain among defiant backbenchers. Without them, the Government has no working majority, and no meaningful reforms can be passed at all — something as important to the bond markets as economic growth.
How Reeves will fund her other spending commitments — from increases to the defence budget to freezing rail fares and much higher infrastructure spending — remains unclear. Until a fortnight ago, the Government’s preferred option was the first increase to the basic rate of tax since James Callaghan’s premiership in the Seventies. But that has since been replaced with a range of smaller, piecemeal measures. One is the touted introduction of a mansion tax on properties worth over £2 million. Significant tweaks to inheritance tax could help too. Other measures might include changing the rules on VAT for taxi fares, and a raid on pension savings. The Exchequer’s central pillar, though, remains freezing income-tax thresholds: something now expected to continue through to 2030.
For all the criticism Reeves faces, her spending priorities are more sensible than those of her predecessors. Jeremy Hunt sounded like a cheerful fantasist when, as Chancellor, with the country’s borrowing costs soaring, he talked of scrapping employee national insurance contributions altogether. Reeves, whatever her faults, is less prone to breezy hyperbole. Not only has the Government backed Sizewell C; it has also allocated £2.5 billion towards research and development for nuclear fusion. At the spring spending review, the Chancellor promised a total of £113 billion in new capital investment for homes, transport and energy. Though far from perfect, the orientation of this government, despite its bludgeoning by much of the media, is more long term than anything we’ve seen over the last 15 years.
But while an emphasis beyond day-to-day media cycles is a welcome change, how the Government intends to raise more revenue still rests on a fatal mistake. Reeves has so far dismissed a wealth tax — an increasingly global cause championed by everyone from Gary Stevenson and Zohran Mamdani to the French economist Gabriel Zucman. Yet while senior Labour figures have publicly dismissed such a move, it is, nevertheless, the affluent they intend to hit for more tax. The thing is, many of them aren’t that rich.
So permit me to say something that might surprise you. Alongside some of the necessary tax rises announced by Reeves, and a potential wealth tax, we need to get serious about higher taxes for those on median incomes — which at the time of writing is £39,000 for someone in full-time work. And before you accuse me of anything, I should add: that includes me.
“We need to get serious about higher taxes for those on median incomes”
Over the weekend, the Financial Times’s John Burn-Murdoch reflected on how Britain has the most “progressive” tax system of any advanced economy. While 45% of top earners’ salaries now go towards taxes and social contributions, that figure falls to just 29% among average workers. Burn-Murdoch compares Britain’s 16-point “top-to-middle” gap to Scandinavia, where it is just 12 points. In the Nordic social democracies, everyone pays tax at a “moderately high rate”. In the UK, on the other hand, high-income earners are taxed like Danes, while those on average incomes more closely resemble Americans. Reeves has, so far, completely neglected this fact — one presumes out of political necessity. While understandable, the truth is that national renewal, an ambition so often invoked by this government, is impossible without accepting change is needed.
Take the personal allowance, the threshold at which one starts paying income tax. In Britain, this is £12,570 (approximately €14,000), a higher figure than anywhere else in Europe. In Sweden, conversely, income tax kicks in at €2,000. In Denmark, it’s just shy of €7,000. Even in France, you start paying at €11,500. It was the Cameron-Osborne duo that really shifted the dial on this side of the Channel, with the tax allowance going from £6,500 in 2010 to £10,000 by the end of the coalition. Like the pensions triple lock, that move received gushing praise from much of the media at the time — “tanks on Labour’s lawn” and so on. And yet it has inflicted extraordinary damage on the country’s long-term fiscal position.
That these tensions are rarely touched on in our political debate reflects the interests of both the Left and Right. Similar to their promise to reduce immigration — only to raise numbers to record highs — the Tories have substantially increased taxes on the previously prosperous burgher class over the last 14 years. The Left, meanwhile, is understandably hostile to the idea that middle-income earners, a constituency they have tried to woo amid Tory collapse in recent years, should be paying more tax.
Yet perhaps the hour of reckoning has arrived. High inequality is bad, not least because people on lower incomes have a higher marginal propensity to spend. And it’s true that we mistakenly tax labour more than capital — a historic error in the context of runaway property prices over the last 30 years. The last Liberal prime minister, Herbert Asquith, was wise enough to observe the iniquity of such a state of affairs more than a century ago. Shamefully, his modern successors don’t share such sagacity.
But it’s also the case that Britain will be unable to correct its varied problems, from under-investment in public transport to private ownership of energy and water, without more tax from a range of sources. A more civilised public realm; re-funding local authorities; addressing the crisis of elderly care; scrapping tuition fees for nursing and engineering students — none of this will be cheap. But there’s little alternative if the country wishes to remain a stable, pleasant place to live or start a business. Until the Chancellor makes that admission, and bases her spending commitments on broader tax rises for median earners, every budget will feel unfairly punitive on those earning even modestly above the average. Increasingly, they will look to move elsewhere. Worry less, then, about the high-profile departure of Lakshmi Mittal than the industrious deputy headteacher, or the ambitious medical graduate. They are happy to pay their taxes, provided the system is fair and the benefits are clear. Presently, neither feels especially true.
Labour are often fearful of speaking in grand terms. Decisive action is even less forthcoming. And yet, as with the ongoing debate around national identity, precisely that is needed on tax and the role of the state. People wish to be protected by the Government, and to be proud of where they live. To a large extent, such desires transcend the old binaries of Left and Right. But neither is possible with a defunded police force, a packed prison estate and local government having meagre resources beyond elderly care. What Reeves should do, then, is sell a vision of the country, an exciting one at that — and then explain how she’ll pay for it.
