Warning as Labour tax hikes may trigger Liz Truss-style meltdown if Starmer wins | Personal Finance | Finance

Starmer will come under intense pressure to reassure markets that he will not trigger a financial crisis by launching a string of tax hikes and spending pledges straight after winning power. If he slips up, Labour’s popularity may never recover, as the Conservative Party has discovered.

Keir Starmer and his shadow chancellor Rachel Reeves must avoid the same fate as former Tory PM Liz Truss, whose disastrous mini-Budget in September 2022 sent mortgage costs soaring and triggered a sterling slump.

“Calamity Liz” survived just 49 days in power – by far the shortest term for any British PM – after blowing up the bond market.

Together with chancellor Kwasi Kwarteng, she pushed through a heap of unfunded tax cuts, which terrified international investors who stopped lending us money.

A repeat of the disastrous “Liz Truss moment”, as it has been dubbed by markets, would derail Starmer’s new government right after taking power. Its reputation would never recover, as happened with “wet lettuce Liz”.

The UK borrowed another £120.7billion on international bond markets in the year to March 2024, pushing our national debt towards a dizzying £2.7 trillion.

The bond markets won’t lend you money if they don’t trust you. Without their cash, Britain would go bust overnight.

Reeves must keep bond markets on side. Otherwise they will demand a premium for lending to the UK or simply refuse, which could trigger another market implosion.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said there is always greater risk of turbulence when a new government beds in, especially if the economy takes a turn for the worse, and Reeves will want to avoid a repeat of the mini-Budget fiasco.

She must therefore shun radical fiscal changes that could rattle financial markets. “The priority will be on keeping the waters calm, even with a super-majority,” Streeter said.

Julia Rosenbloom, tax partner at national law firm Shakespeare Martineau, said markets are wary because Labour has been reluctant to set out clear fiscal plans during the election campaign. “There are many questions still to be answered and, as with any political party, pre-election promises do not necessarily equal definite action once they have power.”

While Labour has ruled out increases to the “big three” taxes – income tax, national insurance and VAT – plans for other key levies such as capital gains tax and inheritance tax remain uncertain.

Rosenbloom said the silence is worrying at this late stage in the campaign. “Labour will almost certainly announce changes later down the line, although the silence now indicates they are unlikely to be crowd pleasers.”

Reeves has denied reports that she will announce an emergency Budget containing a string of tax hikes to fund her spending plans shortly Labour wins.

With Parliament’s summer recess typically falling in late July, she will either have to act extremely quickly or wait until politicians return in the autumn.

Rosenbloom said a “hasty Budget would backfire.” “Hopefully Reees waits until the autumn, in order to take a considered approach to the economy and our personal finances.”

Tom Minnikin, partner at tax firm Forbes Dawson, agreed an emergency Budget is unlikely as Reeves has said she would not hold one without forecasts from the Office of Budget Responsibility (OBR). “In doing so, Reeves has set herself apart from Truss, whose mini-Budget was delivered without publishing OBR forecasts.”

Forecasts typically take around 10 weeks to prepare, Minnikin said. “November is the most likely date for Reeves’ first Budget.”

This could also have the benefit of giving the new chancellor more fiscal headroom if interest rates have started falling and the economic outlooks is rosier. “It may allow her to dispel claims Labour is intent on increasing taxes.”

The nation will be watching closely to see what her plans are. So will the bond market. Reeves has to get this right.

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