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

Rishi Sunak thinks Sir Keir Starmer and Rachel Reeves are setting a trap. “We have been suffering from a series of budget leaks for days,” a Sunak adviser told me. “There’s talk of almost every conceivable tax lever about to be pulled. But we just don’t buy it.

‘Labour is not that politically inept. In reality, we think the budget will be largely neutral on taxes, 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 – could be on to something. Labor insiders are remaining tight-lipped about the details lurking in the Chancellor’s famous Red Box. But they admit it will be a very political statement.

“It’s going to be very difficult for the Tories,” a Treasury source claimed to me. “The reason they were voted out was because people were sick of what they were doing. They didn’t want another five years of the same old boom and bust. So if Sunak and co just try to antagonize us, it will look like they haven’t learned any lessons from the election.’

Starmer’s allies believe the Tories have already made one big mistake by delaying the selection of a new leader until next Saturday.

One Shadow Minister joked: ‘People have said, ‘It’s taken you so long to get this budget together’, but for us it can’t have taken that long because the Tory leadership election is still ongoing .’

The fact that it is Sunak who will deliver the rebuttal on behalf of his party on Wednesday is something that Reeves’ team believes will work to its advantage.

“Sunak is the past,” one told me, “and if the country sees him criticizing Rachel they will only be reminded why they have come to hate the Tories so much.”

According to the Chancellor’s friends, her budget forecasts are based on three main principles. The first is that whatever additional taxes are levied, they must generate net revenue.

“We are not going to raise taxes that would actually cause us to lose revenue, because it will deter people,” one minister explained. “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 cast doubt on whether the Chancellor will go ahead with plans for a new non-domestic tax, given a Treasury assessment which indicated this would cost money as wealthy foreigners would simply leave the UK altogether .

The second core principle is that the lever of taxation should be used sparingly.

“Rachel has always been clear that we don’t have the room for significant tax increases,” one ally explained. “It wasn’t just a manifesto promise not to raise taxes on working people. The Tories have already raised taxes so high that people could no longer bear it. We understand that.’

The third principle is that all available money should be spent on what Reeves calls “the people’s priorities.” That means new investment in the NHS, schools and national infrastructure. “We are going to start filling those gaps,” a finance ministry source promised.

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

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

She should have done better – because Labor MPs are nervous about the political backdrop to the government’s first major budget event.

“We can’t afford to screw this up,” someone said to me. ‘We have already taken a huge hit on the winter fuel surcharge. If Rachel and Keir drop the ball, we’re in serious trouble. It doesn’t matter what mess the Tories are in.’

Reeves is well aware of how much depends on her first budget. That’s why she has chosen to break convention and will do a big round of media interviews next Sunday – the same day the Tories will parade their new leader. “We’re not clearing the field for them,” an ally of Reeves told me. ‘We need to own this budget, rather than doing what Jeremy Hunt (the last chancellor) and the Tories did, which is do the morning press round the next day, and then leave the field.’

But some ministers are concerned that while Reeves understands the significance of the moment, her leader may not. They are particularly concerned that Starmer is once again taking a legalistic 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 about the tax proposals,” one person told me. ‘They said, ‘Oh, if you look at our election manifesto, we promised not to raise taxes on working people. So if we freeze the tax thresholds, that’s technically not an increase. So we kept our word.’

A similar strategy has been followed, with a possible increase in employer contributions to national insurance. Although Starmer promised not to increase National Insurance during the election, he recently explained that this promise only applied to workers’ contributions.

But such fallacies cannot be justified. The Prime Minister has already used too much political capital on the Lord Alli donations scandal and the prison release row to take the wind out of voters’ sails. He has promised not to raise taxes, and unless his popularity takes another hit, he must keep that promise.

No amount of pleading about inheriting a £22 billion black hole from the Tories will allow him to drag millions of lower-income taxpayers into a higher tax bracket without major public outcry. And his own MPs know it.

“There can be no more mistakes,” someone said to me. “We said we wouldn’t raise taxes on workers. And we better not do that. If it turns out that we have broken our word on that issue, the voters will never forgive us. And they have a long memory.’

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