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Spring Budget Leaves Labour Facing Squeeze On Manifesto Plans

The tight fiscal environment following Wednesday's budget has left Labour with a narrower option of revenue raising measures to fund their policies. (Alamy)

6 min read

Tight public finances after the next election could leave any potential Labour government forced to make significant decisions on taxation and borrowing to pursue its manifesto plans, after Wednesday's Budget saw chancellor Jeremy Hunt eat into the party's plans to raise revenue.

The Budget on Wednesday saw a raft of changes to taxation, including a two per cent cut to National Insurance contributions (NICs) in part funded by an abolition of the "non-dom" tax status and an extension of the windfall tax on oil and gas companies - both of which Labour had intended to abolish to raise money for schools and this NHS.

Shadow chancellor Rachel Reeves has not said Labour would reverse decisions Wednesday's budget despite it eating into some of Labour's revenue raising plans, also saying her party would "go through every pound spent, every tax raised" in order to make sure Labour are able to "continue to fund those commitments" in its planned manifesto. 

"We will identify the savings we can make to fund this," she told BBC Radio 4's Today programme. 

It comes against a backdrop of economists warning not only has Hunt left "buffer room" in the budget that the Office for Budget Responsibility (OBR) has described as "historically" low, but the spending plans forecast post-2024/25 could lead to deep spending cuts in unprotected departments. 

"We fully expect that we are going to inherit possibly the worst financial position that any government has received in modern political history and because of that, we've laid out our fiscal rules; we're going to abide by them," a Labour source told PoliticsHome.

"The shadow chancellor has been really public on it... we have have fiscal rules, and we are going to be having to make some tough decisions in government, we're not shy about that."

Despite this, the source insisted the party was "fully" confident and committed the party would be able to fulfill existing commitments following the Budget, including policies that were intended to be funded by the abolition of the "non-dom" tax status - such as school breakfast clubs. 

George Dibb, associate director for economic policy at IPPR, described current spending plans post 2024/25 as "just totally unfeasible" - meaning any future government was going to have to spend more than forecast. 

"Regardless of whether it's a Conservative prime minister or Labour prime minister, those cuts are just totally unfeasible," said Dibb.

"Nobody thinks they are sensible, so the sooner people realise that, the better.

"This is one per cent nominal increase in public sector budget, when you spread that over the next parliament and make it real in terms of unprotected departments, you're looking at almost 20 per cent cuts in some of them - and these are in departments like the Ministry of Justice, which is already not performing well."

Beatrice Boileau, research economist at the Institute for Fiscal Studies (IFS) said while there weren't any "big changes to spending packages" in Wednesday budget, there was "significant problems for unprotected departments" that would mean real terms cuts in some areas of between 1.9 per cent and 3.5 per cent. 

Boileau said spending plans have been "topped up" at spending reviews in the past, and - with public services already struggling post-austerity - a Labour government could have to explore increasing taxes or borrowing to protect public services from deteriorating further in the post-2024/25 period if they win the next election. 

"It will be really quite hard for Labour to continue without seeing public services worsen, particularly unprotected ones, if they don’t top up spending plans to any degree," said Boileau.

"But in order to do that they would need tax to be higher or borrowing to be greater. Without those things, it will be really tough to keep public services functioning at their current level.”

And Sam Tims, economic researcher at the New Economics Foundation, said while the chancellor had taken some of Labour's revenue raising ideas - such as abolishing the "non-dom" tax status - they weren't "substantial" amounts of money and it was "not a massive ask for Labour to find savings elsewhere". 

"For example, Labour are already committed to increasing the additional stamp duty on overseas buyers... you could increase it by quite a lot more than that, and bringing a lot more revenue than just a one percentage point increase..." said Tims. 

"Labour are shying away from talking about any form of wealth taxation, but it's probably something that they're going to have to kind of consider seriously if they do win the election. "

A Labour MP and former shadow minister told PoliticsHome while Wednesday's budget didn't "radically change anything" it did pose Labour with more of a challenge to fund some of its ideas. 

"Rachel [Reeves] is going to have to find £2.9bn for the free school breakfasts, dentistry, and some other things," they said. 

"But in the envelope of government spend that is very little money - a much bigger problem is in the unprotected departments... there's £20bn of cuts from this budget.

"Rachel's going have to find £20bn just to match the spending the government was doing before, which was already very heavy austerity.

"One of the things that I don't think anybody really noticed was Labour was going to have a windfall tax on oil and gas - the government has extended the windfall tax on oil and gas... she can't go there, so the roots are slim.

"And so it's going to be very difficult for her unless things happen outside of her control, which means tax revenues are going to greatly increase - which I don't really see where that's going to come from."

The MP also warned that while unlikely to be an issue during an election campaign, should Labour win the next election frustration about spending is likely to make any Labour "honeymoon" period "very short". 

Rach Reeves"It's going to be difficult within Labour between the leadership, the councillors, the parliamentary Labour party, and with the public - it's going to create a strain, and the expectation gap is going to come in very quickly," they said. 

"It's going be a very short honeymoon, and Rachel needs to grasp that and think about revenue raising ideas to meet that expectation gap and we're not hearing that. We're just hearing expectation management."

On the fiscal situation Josh Simons, director at Labour Together, said while the Budget was "unlikely to move the dial" in political or economic terms, the public spending forecasts were "pretty unpleasant" and "brutal". 

However, Simons said this was "the Conservatives' problem" during the coming election - arguing Labour should focus on promoting its plan for economic growth to raise revenue around planning reform, private investment, GB Energy, and "the hope and injection of stability a change of government will bring". 

"In election terms, that's the right course of action," said Simons.

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