Rachel Reeves’s Impossible Task: Balancing the Books Without Breaking Promises

Introduction

Chancellor Rachel Reeves has insisted that the government’s day to day spending, such as healthcare and policing, should be entirely covered by tax receipts. However, according to the National Institute of Economic and Social Research (NIESR) the government is on track to miss this target by £41bn, which, if NIESR is correct, would seriously damage Labour’s credibility on economic discipline.

Reeves’s impossible ‘trilemma’  

In attempting to fill this fiscal gap Reeves faces three significant obstacles. Firstly, she must uphold her fiscal rules. Secondly,  she must honour spending commitments made by Labour in key sectors such as education and infrastructure. Thirdly, she is bound to Labour’s manifesto pledges that oppose tax hikes especially for the working class. It seems to meet her promise, that governments day to day spending would be covered by tax receipts, one of these three obstacles will prove unavoidable.

Political

As mentioned previously Reeves faces an impossible ‘trilemma’. The balancing act between these three obstacles is highly politically sensitive, especially with Reform UK gaining increasing traction by linking economic decline to high migration. Labour’s difficult challenge is to frame any tax increase as necessary and fair, highlighting investment in projects like Northern Powerhouse Rail.

Economical

The fiscal gap – the difference between projected tax revenues and planned spending –  stands at around £41bn. If this gap widens, Reeves may be forced into more drastic revenue raising measures, potentially breaking manifesto promises. Current options to increase tax include freezing income tax bands (which raise revenue by pulling more people into higher tax brackets over time), raising duties on unhealthy foods, increasing gambling taxes, and even lifting the long-standing fuel duty freeze. The government must balance these measures with protecting economic growth.

Social

Any tax rises will likely directly affect household budgets, especially if indirect taxes such as duties on food, gambling, or fuel are targeted. Reeves will aim to soften the political fallout by linking increased taxes to policies that will improve living standards and tackle social issues, such as funding the removal of the two-child benefit cap or investing in health-related programmes. This ‘fairness’ narrative will be key to public acceptance.

Technological

Whilst technological development is not at the forefront of this issue there may still be technological impacts. Part of Reeves’s broader economic plan involves accelerating infrastructure and technology related projects to boost overall productivity. Plans include speeding up planning approvals for data centres and other strategic developments, as well as investing in Northern Powerhouse Rail. These projects are positioned as catalysts for regional growth and long-term competitiveness in the UK economy.

Legal

As previously mentioned, Reeves is bound by Labour's manifesto pledges, which include pledges not to raise income tax, employee National Insurance, or VAT. Breaking these pledges does not carry legal consequences however there may be severe political fallout. Changes such as broadening the scope of VAT or introducing new duties may be legally straightforward but politically delicate.

Environmental

Environmental considerations may shape Reeves' decision regarding the potential lift on the freeze on fuel duty. This would align with Labour’s net zero commitments and encourage the shift to electric vehicles. Investments in rail infrastructure also could support net zero commitments by promoting greener transport. However, any move to raise fuel duty risks public backlash, especially in rural areas.