Reeves accepts impact of taxes on growth as she orders Cabinet to tighten belts

Chancellor Rachel Reeves has acknowledged higher taxes could hit economic growth as she sought to reassure businesses about her Budget plans.

Cabinet ministers have been ordered by the Chancellor to keep a tight rein on spending in order to reduce the pressure on the public finances, limiting the need for taxes to balance the books.

Business chiefs have warned Ms Reeves not to repeat last year’s tax raid, which saw a £25 billion hike in employers’ national insurance contributions.

Economists have warned Ms Reeves could be forced to unveil more tax hikes in the November 26 Budget to meet her goal of balancing day-to-day spending with revenues.

The Chancellor is constrained by Labour’s manifesto commitment not to increase income tax, national insurance and VAT – ruling out three of the biggest revenue-raisers and causing fear among businesses that she may target them for cash instead.

She told the British Private Equity and Venture Capital Association (BVCA) summit in London that she had to hike taxes in her first budget to put the finances on a firm footing and to fund public services “but I think we got the balance right”.

Ahead of her second Budget, she said Prime Minister Sir Keir Starmer had been clear that “growth is our number one mission”.

The Chancellor said: “I do recognise that tax policy does impact economic growth. One of the reasons why I spoke about the need for spending restraint at Cabinet yesterday is that I recognise (that) to make sure that the numbers add up it’s not just what you bring in, it’s also what you’re spending.

“But crucial for all of this is economic growth. If you can grow the economy, you can make these decisions around tax and spend so much easier.

“One of the reasons why taxes have risen to such a high level is because we’ve had such poor growth and such low levels of investment and such a deterioration in our productivity performance, both compared to the past, but also compared with other countries.

“I’m determined to drive those things up, and that is why growth continues to be the number one mission of this government, and tax policy also needs to reflect that mission.”

At Tuesday’s first meeting of Sir Keir’s new-look Cabinet, Ms Reeves warned ministers they would be restricted in seeking emergency Treasury funding if they exceeded their spending plans.

Ms Reeves told the BVCA: “Access to reserve claims are being tightened because I want to really bear down on spending.”

She highlighted Jonathan Reynolds’ reshuffle move from business secretary to Chief Whip as a sign that Labour MPs would be brought into line behind the Government’s agenda.

A revolt over planned welfare reforms has put a £5 billion hole in her spending plans, and the Government was also forced to climb down over restrictions on eligibility for winter fuel payments.

Ms Reeves said Mr Reynolds had a “really important position” because the former business secretary “will be responsible for driving legislation through Parliament”.

“He knows how important it is to grow the economy. He knows how important it is to get Labour MPs in that place, and he’s got a really important role to contribute there.”

The Chancellor also highlighted the Government’s drive to reduce the number of regulators and the burden of red tape.

She said: “We want to make it easier to do business in Britain, ripping out those things that have been blocking growth, and backing the builders.”

Ms Reeves’ comments at the BVCA came after the head of the Confederation of British Industry (CBI) called on her to ditch her manifesto commitments on the taxes paid by workers.

Writing in the Guardian newspaper, CBI chief executive Rain Newton-Smith said the “time for tinkering is over” and warned Ms Reeves against “slavish adherence” to tax promises made in the run-up to last year’s general election.

She warned that another tax hit for businesses “would leave us with a growth plan in name only”.