DAN HODGES: Reeves’ first budget could be a dangerous political trap… for conservatives

Rishi Sunak believes Sir Keir Starmer and Rachel Reeves are setting a trap. “We’ve had a series of budget leaks for days,” a Sunak adviser told me. ‘It has been said that almost every fiscal lever imaginable is about to be removed. But we just don’t believe it.

Labor is not that politically inept. In fact, we believe the budget will be broadly fiscally neutral with most of the additional money coming from borrowing.’

The former Prime Minister – whose response to Reeves on Wednesday will be the last major act of his parliamentary career – may have hit the nail on the head. Labor insiders are silent on the details hidden inside the Chancellor’s famous Red Box. But they admit it will be a highly political statement.

“It’s going to be very complicated for the conservatives,” a Treasury source told me. ‘The reason they were eliminated was because people were fed up with what they were doing. They didn’t want five more years of the same old boom and bust. So if Sunak and company simply try to oppose us, it will look like they haven’t learned any lessons from the election.’

In fact, Starmer’s allies believe the Conservatives have already made a big mistake by delaying the selection of a new leader until next Saturday.

One shadow minister joked: “People have been saying: ‘It’s taken them a long time to put together this Budget’, but it can’t have taken us that long because the Conservative leadership elections are still ongoing.”

The fact that it is Sunak who will present Wednesday’s rebuttal on behalf of his party is something Reeves’ team believes will work in their favour.

“Sunak is the past,” one told me, “and when the country sees him criticizing Rachel, they will remember why they came to hate the Tories so much.”

According to the Chancellor’s friends, her fiscal forecasts are based on three fundamental principles. The first is that whatever additional taxes are applied, they must generate income on a net basis.

“We are not going to increase any taxes that make us lose income because it scares people,” explained a minister. “This will not be an ideological budget.”

Such thinking indicates that, despite reports, Reeves is not considering raising the capital gains tax to 39 percent. It also appears to raise doubts over whether the Chancellor will press ahead with plans for a new non-dom tax, given a Treasury assessment that it would cost money as wealthy foreigners would simply leave the UK altogether.

The second basic principle is that the tax lever should be used sparingly.

“Rachel has always been clear that we have no room for significant tax increases,” one ally explained. ‘It was not simply an overt promise not to raise taxes on workers. The Tories have already raised taxes so much that people couldn’t stand it. We understand.’

The third principle is that any money available should be spent on what Reeves calls “the people’s priorities.” That means new investments in the NHS, schools and national infrastructure. “We’re going to start plugging those potholes,” a Treasury source promised.

And if that agenda sounds familiar, ministers are only too happy to acknowledge that Starmer is stealing the clothes of one of his high-profile predecessors.

“Basically, it’s Boris’s strategy,” one minister told me. ‘Not only build things that people want, but also things that they can see. Although Boris only promised it. Rachel is really going to give birth.

You’d better, because Labor MPs are nervous about the political undercurrents of the Government’s first big fiscal event.

“We can’t afford to screw this up,” one told me. ‘We have already suffered a hard blow in the winter fuel subsidy. If Rachel and Keir drop the ball, we’ll be in serious trouble. It doesn’t matter what mess the conservatives are in.

Reeves is well aware of how much depends on his first budget. That is why he decided to break with conventions and will hold an important round of interviews with the media next Sunday, the same day that the conservatives will parade their new leader. “We won’t give them a free hand,” a Reeves ally told me. “We need to take ownership of this budget, instead of doing what Jeremy Hunt (the last Chancellor) and the Conservatives did, which was hold the morning press conference the next day and then walk off the pitch.”

But some ministers are concerned that while Reeves understands the importance of the moment, their leader may not. In particular, they are concerned that Starmer is once again taking a legal approach to what is a highly politicized national event.

“If you look at what has come out of Number 10, they have been too legalistic with the tax proposals,” one told me. “They’ve been saying, ‘Oh, well, if you look at our election manifesto, we promised not to raise taxes on workers.’ So if we freeze the tax thresholds, that’s technically not an increase. Then we’ll have kept our word.

A similar strategy has been adopted with a possible increase in employers’ contributions to National Insurance. Although Starmer pledged not to increase National Insurance during the election, he has recently reported that the pledge only applies to employee contributions.

But such sophistry is useless. The Prime Minister has already spent too much political capital on the Lord Alli donations scandal and the prison release row to be able to fool voters. He made a promise not to raise taxes, and if he doesn’t want to suffer another major blow to his popularity, he must keep it.

No amount of claims about the Conservatives’ inheritance of a £22bn black hole will allow them to drag millions of lower-income taxpayers into a higher tax bracket without a huge public outcry. And their own deputies know it.

“There can’t be any more blunders,” one told me. ‘We said we would not increase taxes on workers. And you better not. If we are deemed to have broken our word on this, the voters will never forgive us. And they have a long memory.

On Wednesday Rachel Reeves delivers her first Budget. And for both Rishi Sunak and Sir Keir Starmer it represents a very deep and very dangerous political trap.