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Sir Keir Starmer has admitted for the first time that he was planning a manifesto-busting increase to income tax rates in the run-up to the Budget, as he denied misleading voters about the public finances.
The UK prime minister, in a speech on Monday, gave his backing to chancellor Rachel Reeves and defended last week’s Budget, saying “there was no misleading” about economic forecasts from the official fiscal watchdog.
“There was a point when we thought we might have to reach for a manifesto breach of some significance. I didn’t want to get to that place but I recognised that we might have to,” he told reporters in central London.
Labour promised in its manifesto not to raise the rates of income tax, value added tax or national insurance. In Reeves’ first Budget last year, she raised the rate of national insurance paid by employers.
In the lead-up to last week’s Budget, Reeves had spoken publicly about the negative impact of weaker productivity growth forecasts on tax revenues and refused to rule out raising income tax rates.
The Office for Budget Responsibility revealed on Friday that it had informed the chancellor ahead of the Budget that these weaker forecasts were offset by other improved estimates for tax revenues.
Starmer denied that his government had misled the public about the forecasts in an attempt to soften up the public for tax rises. He also criticised the timing of the OBR’s productivity downgrade.
“I’m not sure why it wasn’t done at the end of the last government,” he told reporters. “I’m not angry, I’m just bemused as to why it wasn’t done then.”
He also expressed his support for the OBR, saying the independent forecaster was vital for financial stability, despite its accidental leak of the Budget last week 50 minutes before Reeves had started speaking.
Reeves in her Budget on Wednesday ultimately did not raise income tax rates but instead raised £26bn in new taxes largely by extending a freeze on personal tax thresholds.
The money largely went towards boosting the buffer the government has against its key fiscal rule and on increased welfare spending.
Starmer also declared on Monday that he would seek a closer relationship with the EU to boost growth, warning voters that undoing some of the damage of Brexit would “require trade-offs”.
Addressing criticism that the Budget did not do enough to support growth — which Starmer has declared his “number one mission” — the prime minister said it was time to “confront the reality” about the damage done by Brexit.
Starmer’s embrace of a closer trading relationship with the EU was a surprise and hinted at a willingness to go further than May’s initial post-Brexit “reset” with Brussels. The issues of “rule-taking” from Brussels and financial contributions to the EU are likely to arise.
“The Brexit deal we had significantly hurt our economy,” he said. “For economic renewal we have to keep reducing frictions. We have to keep moving towards a closer relationship with the EU, and we have to be grown-up about that, to accept that will require trade-offs.”
Starmer’s allies confirmed that the prime minister wanted to go beyond the outline deal with the EU announced in May, which aimed to increase trade in foodstuffs and energy as well as introduce a youth mobility scheme.
For now Starmer has so far not shown any willingness to countenance rejoining the EU customs union, a course advocated by the Liberal Democrat leader Sir Ed Davey. Number 10 did not deny an Observer report that Baroness Minouche Shafik, Starmer’s economics adviser, also backs the move.
Starmer’s first priority is to conclude a formal agreement on the deal sketched out with the EU last May, with negotiations on issues such as the youth mobility scheme expected to be fraught.
London and Brussels have also failed to agree on a deal that would have seen Britain take part in the new Security Action for Europe (Safe) EU defence fund.
