Labour will launch a new era of public and private investment in hospitals, schools, transport and energy as momentous as any in the party’s history in this week’s budget, the chancellor, Rachel Reeves, has said.
In an interview with the Observer before the first budget by a female chancellor, Reeves draws comparisons with Labour’s historic reform programmes begun in 1945 by Clement Attlee, in 1964 under Harold Wilson and in 1997 under Tony Blair.
“This is only the fourth time that Labour has gone from opposition into government,” she says. “In 1945, we rebuilt after the war; in 1964, we rebuilt with the ‘white heat of technology’; and in 1997, we rebuilt our public services. We need to do all of that now.”
Reeves will, however, face huge controversy amid claims that she will break at least the spirit of Labour’s election promises when she announces £40bn of tax rises and spending cuts that will include an increase of up to 2% in employer national insurance contributions (NICs) and a likely further freeze in income tax thresholds beyond 2028.
Such a freeze on thresholds – which Reeves described last year as “picking the pockets of working people” when the same policy was reannounced by the Tories – will drag 400,000 people into paying tax for the first time and 600,000 into doing so at a higher rate.
Before the election, Labour ruled out any increases in income tax, national insurance and VAT on “working people”.
In the interview, Reeves claims that she is in fact keeping to her election pledges in full, as people will not see their taxes rise immediately after the budget and national insurance rises will not directly affect employees. “The day after the budget, people are not going to see those main taxes that they pay – income tax, national insurance, VAT – going up … We promised at the election that we wouldn’t put up those taxes for working people.
“One of the things that has eroded trust in politics and politicians has been a failure to stick to manifesto commitments. We don’t want to be that sort of government, I don’t want to be that sort of chancellor.”
But Jeremy Hunt, the shadow chancellor, said that raising employer NICs was a “jobs tax that is paid by working people”, which would mean “fewer jobs and lower wages”, as employers would pass on the effects to those they employed in the form of lower wages or redundancies. He cited the Institute for Fiscal Studies as saying the rise would be a “straightforward breach” of promises.
While she is bound to face a backlashes over tax rises, Reeves is determined to portray the budget as the launch of a period of huge “national renewal” that will tackle the legacy of chaos left by the Tories – a £22bn black hole in current spending – through tough decisions on tax, while changing the fiscal rules to allow £50bn of extra borrowing for capital projects to reverse a decline in infrastructure across the public sphere.
As part of the twin-track approach, £1.4bn will be directed towards “rebuilding crumbling schools”, with 50 schools rebuilt a year. Hospital rebuilding projects are expected to be announced alongside these in the budget. Reeves says such schemes would not be possible without changing the fiscal rules, and makes clear she expects the Tories to oppose such changes in the aftermath of the budget.
Sensing the opportunity to open a new dividing line with the Conservatives, Reeves says: “If they oppose our new fiscal rules next week, they will basically be saying they support the current path of decline. We are happy to have that debate. We are on the right side of it.”
She adds: “I think the big divide in politics after this is going to be whether you are in favour of investment or whether you are in favour of decline.
“We inherited a plan from the previous government in which public sector net investment, capital investment, would be falling sharply over the course of this parliament, and that would mean scores of hospitals not built. It would mean massive opportunities to grow our economy in the digital and energy sector would be missed and those jobs would go elsewhere.”
She spells out how she sees two types of investment as crucial to transforming the country, as a direct result of reforming borrowing rules.
The first will be projects that “crowd in” big private sector investment alongside public funding, such as the plan recently announced for £21bn of public investment in carbon capture and storage alongside billions of pounds of private investment. There will be other such public-private models in the energy, digital, science and transport sectors, to be announced in the budget.
The second type of investment will be in “the public realm”, with the rebuilding of urgently needed schools and hospital buildings.
New and developing industries also offer huge opportunities that invite investment, she says.
“This is a new settlement on Wednesday to rebuild our country and seize the massive opportunities in technology and energy that are out there. There is a global race on for those jobs and we need to seize them for Britain. If we can unlock that investment, public and private, then we can do great things as a country again.”
Reeves says that while she will not be lifting the two-child benefit cap that is blamed for plunging thousands more young people into poverty, she will be taking other actions to alleviate child poverty.
“We are a good Labour government, and good Labour governments lift children out of poverty and fix the National Health Service. I hope that people can see that I am starting to turn the corner.”
