Are Rachel Reeves and Keir Starmer in denial about the ‘T’ word?

Rachel Reeves is trumpeting £15.6bn of transport projects, mainly in the North and Midlands – and it’s no coincidence that these regions are where Nigel Farage’s Reform UK poses a threat to Labour.

The chancellor has £113bn of such capital projects to announce in next Wednesday’s spending review, which will set departmental budgets for the next three years. But building projects that will take years won’t mask the bad news – more immediate real-term cuts in day-to-day spending for some departments as Reeves struggles to meet her fiscal rules. Yet again, Labour will eclipse the good things it is doing with unpopular decisions.

“We are good at getting headlines about the pain but not the gains,” one disgruntled Labour MP told me.

Speaking in Rochdale, Reeves had some good news for such critics: she will rewrite Treasury value-for-money rules for capital projects so regions outside London and the southeast get their fair share. But then, in the eyes of many Labour MPs, she went and spoiled it all by sticking firmly to her still “non-negotiable” fiscal rules. She insisted she did not come into politics “because I care passionately about fiscal rules” but to “make a difference to the lives of working people”.

But she admitted her rules meant that during the spending review, “there are good things I have had to say ‘No’ to.” Bad news trumps good again. Reeves’s allies are frustrated she hasn’t got the credit for the capital spending boost and injecting £190bn more into day-to-day budgets over five years. Yet it’s a problem of her own making. She is reversing her worst mistake – means-testing the winter fuel allowance. She confirmed today that more pensioners would receive it this winter.

The chancellor’s squeeze on departments outside health and defence will generate a lot more negative headlines. The police are warning Starmer directly that they will be unable to investigate some crimes, while two watchdogs say the government will not hit its target to halve violence against women and girls.

This very public lobbying reflects a still unresolved battle between Yvette Cooper and the Treasury over the Home Office budget. Angela Rayner, who wants more money for affordable housing and local government, and Ed Miliband, who is opposing cuts to the warm home schemes, have not yet agreed to their budgets. It wasn’t supposed to be like this: Treasury ministers hoped the review would avoid such traditional last-minute battles through cross-departmental working to deliver Keir Starmer’s five “missions”.

The message was that the cabinet would be a nest of singing birds. Instead, the birds are scratching each other’s eyes out as they fight over the scraps of food left.

Ministers warn the missions will be impossible without the money to deliver them. The three ministers will settle eventually, but in putting up a fight, they are openly challenging Reeves’s authority. A growing number of ministers and Labour backbenchers want her to relax the fiscal rules or raise taxes in the Budget this autumn. Reeves and Starmer are in denial: they don’t want to talk about tax next week, but that won’t stop economic think tanks analysing the spending review and predicting an inevitable tax hike in October.

Reeves stuck to Labour’s manifesto pledge not to raise income tax, national insurance for employees and VAT, saying she had “absolutely no intention” of repeating the £40bn tax hike in her first Budget. Starmer fears breaking the pledge would hand lethal ammunition to Reform and the Conservatives. But the prime minister and chancellor should level with the public and admit that other taxes will have to rise.

If they don’t, Farage will exploit the impact of “Labour cuts” on public services as he shifts leftwards on the economy – a more voter-friendly message than Tory calls for even more cuts. Voters accept that taxes will have to go up to protect public services but don’t want their own bills to rise. It’s no wonder the public is in favour of having its cake and eating it when our politicians fail to show honesty and leadership on the fiscal trade-offs. As Labour backbenchers bemoan the absence of a credible story on what this government is about, one is staring Starmer in the face. He said it himself when launching the defence review on Monday: “Things have changed.”

He could translate his strong record on foreign affairs to his sketchy domestic agenda by arguing that Russia and Donald Trump mean the UK needs to raise taxes to provide a strong defence and a strong economy in what he called the “new world”. Instead, he and Reeves are again tempted to muddle through – the very approach that led to the catastrophic decision on winter fuel.

A majority of people (54 per cent) think we are already in austerity and that Labour has not delivered the change it promised, according to Ipsos.

Such views will be reinforced by the spending review. Promises of long-term road and rail projects won’t repel Reform’s advance unless living standards and public services improve. That won’t happen without more money than will be announced next week.