(Bloomberg) -- Rachel Reeves’ first challenge when it comes to delivering a delicately balanced UK budget at the end of the month is winning over an increasingly mutinous Labour Party.
In 11 days, Britain’s first female Chancellor of the Exchequer will unveil the new government’s economic plans, combining tax rises with short-term spending restraint and longer-term investment in public services as part of a push to raise as much as £40 billion ($52 billion) to restore order to the UK’s finances.
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But while Reeves hopes to sell the package to bond markets and voters alike, she and Prime Minister Keir Starmer face a battle convincing cabinet members that they are taking the right approach to the fiscal statement on Oct. 30 that will set the tone for their administration.
Senior ministers are in revolt over departmental savings required in a one-year spending review accompanying the budget, with some going over Reeves’ head to write formal protest letters to the premier. Party officials who requested anonymity to discussing internal ructions said the entire cabinet, bar a handful of ultra-loyalists, were at loggerheads with the Treasury, while Deputy Prime Minister Angela Rayner pressed a standoff with Reeves over spending at least two days past a Wednesday deadline.
The dissent presents a fresh challenge to Starmer’s fledgling government, which secured a landslide election win on July 4, but has since become mired in a scandal about ministers accepting freebies and a gloomy narrative about the UK’s economic situation. The test for Starmer and Reeves is to persuade their restless party — which had been in opposition for 14 years — that short-term pain is needed to deliver long-term gains and ultimately reelection in five years’ time.
For now, the rebellion has fallen on deaf ears in Downing Street. Starmer and Reeves are united behind the need for difficult immediate decisions on tax and spending in order to fix the foundations of the economy they inherited from the Conservatives, people familiar with their thinking said.
Despite cabinet complaints that cutbacks to projects in 2025-26 are tantamount to returning to austerity — the policy of spending cuts pursued by the Tories last decade — Reeves will argue the Conservatives salted the earth by slashing taxes and baking in impossible future public spending cuts in a cynical attempt to hamstring their likely Labour successors.
That means as well as seeking savings, Reeves is likely to raise taxes on inheritance and capital gains on share sales, increase a business payroll levy, end a freeze on fuel duty, and increase so-called sin taxes on items like alcohol and smoking, people familiar with the matter said. Other plans include delivering on election pledges to raise taxes for rich foreign residents, foreign property buyers, private equity fund managers and private schools.
Planned changes to the debt measure informing Reeves’ fiscal rules will allow her to borrow tens of billions more for capital spending. Bloomberg Economics estimates Reeves will likely increase borrowing by £25 billion and raise £32 billion through tax rises and spending cuts.
Nevertheless, the budget’s underlying message will be positive, centered on a significant medium-term boost to infrastructure, the people said. A Labour official said ministers were shocked by a report late Friday that Reeves was considering a freeze on income tax thresholds, which they said broke the party’s campaign pledge not to raise taxes on “working people.” They questioned why Reeves was favoring this measure over larger taxes on wealth.
Reeves has informed banks and bond investors of the plan and received encouragement that they won’t react adversely, the people said. That’s backed up by Goldman Sachs Group Inc. and Amundi SA increasingly favoring UK bonds, betting Reeves won’t repeat the mistakes in 2022 by market-roiling former premier Liz Truss.
Persuading the public she’s taking the right course is another matter, especially if she can’t win over the cabinet. With the National Health Service prioritized for any available cash, ministers have complained the Treasury wants them to cancel projects to build new roads, fix crumbling public buildings, improve flood defenses, and upgrade vital IT systems, the people said.
One official said Reeves was at odds with her party on what constitutes avoiding austerity. For the chancellor, it means not imposing real-terms cuts on departments, but ministers argue they can’t stand still in the face of broken public services.
“Settling on a cross-cabinet line about what austerity is and is not will be crucial for not only selling the budget, but maintaining Cabinet and party unity,” said Stewart Wood, a Labour peer and former adviser to ex-premier Gordon Brown.
Some ministers who are unhappy with their 2025-26 allocations have been assured that they’ll get a capital spend injection in the next three-year spending review. Others are refusing to sign off on the Treasury’s proposals. In their frustration, some ministers have even privately suggested they could resign rather than accept cuts, though that’s seen in No. 10 as an empty threat.
Reeves’ message is that there is no money now to pay for their demands. Some ministers privately counter that’s only because of the chancellor’s self-imposed fiscal straitjacket after she vowed not to borrow to fund day-to-day spending and ruled out rises to the Treasury’s three main revenue raisers during the general election campaign: income tax, national insurance and value-added tax.
Some think the chancellor should renege on those commitments, reverse the cuts to national insurance made by her predecessor Jeremy Hunt, raise more taxes on wealth and increase borrowing — blaming the Tories for having to break Labour manifesto promises.
A No. 10 official described that idea as naive, insisting Reeves was already pushing it as far as she felt she could get away with in terms of raising taxes and borrowing without tearing up the manifesto or her fiscal rules. The cabinet needs to hold the line for now and there will be a rosier picture ahead, another said. They suggested that ministers who don’t understand the fiscal situation and are seriously proposing breaking the party’s promises shouldn’t be in the government.
Nevertheless, the Cabinet is wary that a budget which lands badly with voters could set an impression that’s hard to change. One minister likened Reeves’ challenge to landing a passenger jet on a tiny runway, asking: How do you do a pro-growth, pro-investment, pro-public services and anti-austerity budget while raising swathes of taxes and cutting spending across the board?
Ultimately, Starmer and Reeves are relying on a tactic that helped take them to power: steady the ship by taking tough decisions early on — as the Labour leader did by reforming his party when he took over in 2020 — before broadening its appeal to the wider electorate in time for the election.
While the budget can’t escape the dire fiscal inheritance, lower inflation, lower interest rates and a sense of momentum from public and private investment will start to lift the fog, a person familiar with its contents said.
One government official characterized Reeves’ approach as prioritizing the bond market over the Cabinet. When voters go to the polls at the next election in 2029, they won’t remember the current rows about austerity, instead rewarding Reeves for mending the public finances and then investing in much-needed services, they said.
--With assistance from Ellen Milligan.
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