What does Angela Rayner’s leaked memo reveal about Labour’s plans?

A leak of a memo from Angela Rayner to Rachel Reeves reveals that the deputy prime minister would prefer a tax on the (relatively) wealthy to cuts in public services. Not exactly a shocker, and hardly a surprise to the chancellor, but an interesting insight into the dynamics of government, and what this year’s public spending review and the autumn Budget may hold.

The leak comes just as the prime minister indicated a partial U-turn on the means testing of the pensioners’ winter fuel payment.

She wants a little more social justice in fiscal policy. Specifically, last year she urged the chancellor to raise £3-4bn from miscellaneous tax hikes rather than, say, chopping disability benefit entitlements.

Her ideas included: increase corporation tax on the banks; freeze the threshold on the 45 per cent income tax rate; eliminate the remaining (£500) tax-free allowance on dividend income; and limit the amount people can put into their pension funds before being taxed.

Nothing. Some of the Rayner proposals would have been more trouble – in political terms – than the revenue they raised, and would have perverse consequences. Limiting the lifetime allowance on pensions, for example, would probably mean more well-paid GPs retiring early and increasing waiting times at surgeries. The self-employed would also be disproportionately hit by another tax on their dividend income; freezing thresholds further would add to existing distortions in the tax system.

Besides all that, Reeves is determined that she and her party lose the “tax and spend” image and she is intensely conscious of the overall tax burden being at post-war highs (albeit personal taxation in the UK is still comparatively light by European standards).

No doubt Rayner opposed the cuts in the first place, but bound by collective responsibility and in the crisis atmosphere of the immediate post-election period, she went along with it. So the U-turn will be highly welcome to her, but it reveals the deep disquiet about the policy within the Labour Party. Recent local election results, the loss of the Runcorn by-election and poor polling figures have forced the hands of the prime minister and his chancellor. The changes to winter fuel allowance were a constant complaint on the doorstep, and the most unpopular of all the things the government has done since it came to power.

In the context of the public finances, it also raised a tiny amount of money. The danger now is that Keir Starmer has raised expectations too high, and anything less than a complete reversal will only add further disappointment.

Well, we’ll find out on 11 June. The rise in inflation isn’t helpful, as it will put pressure on departmental budgets and reduce the chances of more interest rate cuts (and thus the interest bill on the national debt). The Trump tariffs, despite the recent deal, also add to the pressures, but recent GDP growth has been better than expected. It was always going to be tight, however, because it will also have to accommodate higher defence spending, and the fiscal rules remain restrictive.

As a multi-year review, and with little room for manoeuvre, it will be highly vulnerable to unexpected shocks and political pressures, particularly on public sector pay awards and expected “efficiency savings”. Assumptions about AI and productivity gains may well be optimistic. In truth, it won’t be so very different from the situation that prevailed during the Sunak government – including strikes.

It would be a surprise if taxes didn’t go up a bit, and the chancellor will be hard-pressed to meet her rules on borrowing and debt. But the markets have shown that they’re not going to cut her any more slack. She might try to find some extra funds by altering the way the Bank of England pays interest to the commercial banks as it operates monetary policy, but the Bank doesn’t like the idea, and it might not wash with investors, either.

Some of the pensioners will have an easier time paying their energy bills this winter, and the good news for Rayner is that she’s making good progress on building the 1.5 million houses promised for this parliament, but the general air of austerity will linger for some years to come.