Britain is facing cuts after Rachel Reeves doubled down on her manifesto pledge not to raise taxes to fund Labour’s spending plans.
In a speech in Manchester on Wednesday morning, the chancellor insisted Labour’s spending plans – set to be outlined next week – were “fully costed and fully funded” and that she would not need to raise income tax, VAT or employee national insurance contributions.
But a major think tank has joined critics from within government to warn that the chancellor would have no choice but to make cuts to other public services.
The Resolution Foundation said the government has increased departmental spending by almost £400bn since it came to power but pressures to increase health and defence spending will make it “hard to avoid cuts” to other public services.
Reacting to Reeves’s speech, a senior Labour source added: “I suspect that means a lot of cuts.”
It comes days after the government committed to a major boost in defence funding, having also pledged to reinstate the winter fuel allowance to millions of pensioners this winter. Sir Keir Starmer is also under pressure to abolish the two-child benefit cap.
Ruth Curtice, chief executive of the Resolution Foundation, said: “By the end of this parliament, the level of departmental spending will be back to pre-austerity levels, but growing pressure to spend all this increase on health and defence could lead to continued public service cuts elsewhere.
“Whether or not the government can chart a course through health that leans on capital but restrains growth in day-to-day spending will be crucial to the outcomes for everyone else.”
Ben Caswell, senior economist at the National Institute of Economic and Social Research (NIESR), told The Independent that cuts had to be considered without tax rises.
“It is unlikely that the chancellor will be able to afford significant movement on policy without some form of tax rises in the autumn Budget,” he said.
He added that if she did not increase taxes, the chancellor “cannot borrow any more, and not for day-to-day spending anyway, so yes, it has to be cuts from elsewhere”.
The Institute for Fiscal Studies (IFS) director Paul Johnson has also this week warned that tax rises will be needed to meet Labour’s spending commitments, especially in light of this week’s long-awaited strategic defence review, which outlined how the armed forces will be funded.
With the spending review setting the next three years of departmental budgets just a week away, the chancellor insisted her plans were fully costed.
But, inside the government, senior Labour figures have been warning Ms Reeves that Labour will end up having to ditch manifesto pledges on spending.
It has prompted a civil war within the cabinet over her plans for departmental spending, with Yvette Cooper’s Home Office and Angela Rayner’s Ministry of Housing, Local Government and Communities still reportedly holding out.
The issue is now becoming the focus of an awkward by-election in Hamilton, South Lanarkshire, where Labour is in danger of coming third to the SNP and Reform UK as support continues to rapidly ebb away from the government. Reform beating Labour in a part of the UK easily won by Sir Keir’s party last year would be seen as a political earthquake.
As well as increasing defence spending to 2.5 per cent by 2027 and ringfencing health spending, Ms Reeves will be looking for an estimated £5bn to fund a reversal of her decision to remove winter fuel payments from millions of pensioners and end the two-child benefit cap.
Top of the list of areas under threat are local government finance, warm homes insulation packages, the future homes deal, border control, and policing.
During the speech in Manchester, where she announced the biggest ever investment in transport, Ms Reeves was pressed repeatedly by journalists on the manifesto pledge not to increase income tax, VAT or national insurance, but insisted she would stick to her promises.
She was asked: “Are manifesto commitments on policing, housing and energy at risk?”
Ms Reeves responded: “We made those commitments in our manifesto and we stick to them. All of the manifesto commitments that we made were fully costed and fully funded.”
She highlighted the small taxes which Labour said it would raise in the manifesto to pay for extra investment – VAT on private school fees, cracking down on non-doms and introducing the energy levy.
She went on: “Those promises were fully funded. We have raised those taxes to put that money into our public services, which is why we can deliver on our manifesto commitments, including not increasing the key taxes working people pay – income tax, national insurance and VAT.”
There is a push by many Labour MPs and trade unions for the chancellor to agree to more spending and instead raise the cash through wealth taxes.
Spearheading this has been Ms Rayner, who, according to a leaked memo, wants eight wealth taxes.
An ally of Ms Rayner told The Independent that the spending review has now become a “proxy war” over the future direction of the party and current Labour government, with both Ms Reeves and Sir Keir potentially in the firing line.
The senior party source warned: “I think this spending review will realistically see the ending of a number of manifesto pledges as actually being deliverable.”
The row dominated PMQs, during which Sir Keir avoided answering detailed questions on the spending review, winter fuel and the two-child benefit cap.
Tory leader Kemi Badenoch claimed the government was in “chaos, chaos, chaos”.
