by Former Bank of England governor Mervyn King has made a dramatic intervention to Rachel Reeves that she must raise national insurance in her Budget on 30 October.
According to the Institute for Fiscal Studies (IFS), the Chancellor has an estimated £25bn black hole to fill to meet Labour’s spending promises.
But in an open letter published in The IndependentLord King warns her not to get higher loans.
Lord King, who was once the chancellor’s manager at the Bank of England, told her: “Keep it simple and be brutally honest with the public.”
And he warned: “Resist the temptation to fiddle with the tax system – it’s time to have a proper look at the various schemes introduced by successive Chancellors since Nigel Lawson’s last major reform.”
But the Tories claimed that if she raised any form of national insurance, as said, it would be a breach of the manifesto promise to the voters – a point echoed by Paul Johnson of the IFS yesterday. He said: “It seems to me that it would be a simple breach of manifesto commitment. I went back and read the manifesto and it clearly says, ‘We will not raise national insurance rates.’ It does not specify employees’ national insurance.”
Mr Johnson previously warned during the election that the tax and spending promises of the main parties were a “conspiracy of silence” on the real picture of the country’s finances.
In an open letter dating back to his days as a graduate recruiter at the Bank, Lord King indicated that the baton has now been passed to Ms Reeves and her generation.
“I remember you telling me one day that the reason you enjoyed working at the Bank of England was the opportunity to work with other wonderful young people. Your generation is now in charge.
“Let’s be courageous, be bold, and ensure that the economic legacy we leave to our grandchildren is one they and we can be proud of. One day, you will look back on your time as Chancellor and you will want to remember the far-reaching changes you made – not the political compromises that others will urge you to make.”
He also told Ms Reeves that she must stick to her policy of making tough decisions but do so by “tackling the vested interests”, including the unions, who remain the Labor Party’s main funders.
“The biggest challenge for you and your colleagues is to tackle the vested interests that will oppose reform – be it the NHS bureaucracy, teachers in schools and universities, planning authorities, unions, and many others who will defend their current interests,” he noted.
But he also believed that national insurance rises should clearly focus on paying for investment in the economy to achieve growth and pushed for it to encourage people to save for pensions again.
The landmark intervention comes on a day when prime minister Sir Keir Starmer again strongly hinted at the possibility of tax rises through employer contributions to national insurance.
During the general election Labor limited its room for maneuver by promising “not to raise taxes on working people” including income tax, VAT and national insurance contributions from employees. Ms Reeves limited her options yesterday by promising business leaders at the International Investment Summit that she would also cap corporation tax at 25 per cent.
There is widespread speculation that Ms Reeves is considering other dramatic measures, although Sir Keir has disputed reports that they would increase capital gains tax to as much as 39 per cent which is “worldwide”.
Other possible measures could reduce international aid as a proportion of GDP as well as wealth taxes including capital gains and inheritance tax increases.
But with Ms Reeves said to be considering rewriting the fiscal rules to allow more borrowing, Lord King has warned that the deals will not be blocked.
“It is an illusion to pretend that the stability of public finances is achieved by changing the definition of debt, deficits or the fiscal rule,” he wrote in his letter, dear Rachel.
“The financial markets know that higher borrowing means higher borrowing. A new fiscal rule – including public assets as well as public liabilities – will not make your task any easier.”
He added: “Avoid slogans like ‘loan for investment’. There is only one sensible definition of fiscal sustainability. It will mean that the structure of the tax rates will generate enough revenue to allow the ratio of debt to national income to fall slowly but steadily in normal years.”
Instead, he called for an increase in national insurance contributions and urged Ms Reeves to be honest with the public about it.
“It would be an honest approach to say that such a commitment now is a mistake and to return National Insurance contributions to their previous level. It might surprise you how many citizens would accept that honesty; it is better to tackle the problem now and not a year or so before the next general election.”
Lord King also warned that the UK cannot afford to invest more unless we save more”. He urged Ms Reeves to avoid measures “that could reduce private savings”.
He added: “It is also time for a fundamental change in our pension system. Thirty years ago, the UK had defined benefit pension systems that were the envy of the world. Today, due to the unintended consequences of regulation and low interest rates, it has become virtually obsolete for new entrants in the private sector.”
