Reeves to scrap two-child benefit cap in budget to appease Labour rebels
Keir Starmer and Rachel Reeves are preparing to move left on the budget to buy themselves time and prevent a leadership coup attempt by backbenchers.
The Independent has been told the chancellor will bow to pressure to scrap the two-child benefit limit altogether and introduce a series of wealth taxes to plug the spending black hole in his budget.
Backbenchers and senior party members were assured that the tax raid would include a mansion tax on properties worth more than £2 million, a profits tax on gambling companies called for by former Prime Minister Gordon Brown and a tax on bank profits.
It is also reported that Ms Reeves will increase capital gains tax, but will fall short of matching it with income tax levels.
Speaking to The Independent, one minister said: “The ink certainly won’t be dry on this budget by Tuesday night but it looks like the PLP.” [parliamentary Labour Party] It gets what it wants…an end to wealth taxes and the child benefit cap.”
But the contents of the budget now depend on the future of Sir Keir and Mrs Reeves, and speculation continues that the Prime Minister could be sacked following a Downing Street briefing that accused Wes Streeting of conspiring to replace him.
As well as Mr Streeting, former deputy prime minister Angela Rayner, energy minister Ed Miliband and home secretary Shabana Mahmood have also been the center of leadership speculation over the past two weeks.
A senior party source told The Independent: “The prime minister and chancellor are buying themselves time. There will be some elements in the media who hate these taxes but it will please members and the PLP.”
It also turned out that the decision to cancel the income tax increase, which broke the manifesto commitment, came after the pressure of the backbenchers.
A Labor MP said: “It’s hard enough for us to have a doorstep hearing, but if we do that the message gets out. [raise income tax]Then the doors would close on us and never open again.
“People would say, ‘you lied, we can never trust you again’.”
Another MP noted that recent interventions by new deputy leader Lucy Powell, who was elected to replace Angela Rayner on a platform criticizing the Starmer premiership, “very much speaks to the PLP’s concerns”.
Ms. Powell opposed income tax increases but strongly supported a “fair tax system,” including wealth taxes.
It has already become impossible to make significant cuts to welfare or other spending after the benefits revolt forced Ms Reeves and Sir Keir to abandon cuts worth £5bn.
In addition, there is a belief that moves to toughen up on asylum and dilute human rights need to be balanced with more left-wing economic measures.
Another MP said: “There is a lot of unhappiness about us copying the Reform with asylum announcements this week, so they seem to have reached a point where they have to listen to us on the economy.”
The bank levy, heavily implemented by the Trades Union Congress, could raise £30 billion by 2029 if Ms Reeves sets it at 16 per cent.
Meanwhile, removing the cap on how many children in a family can qualify for child benefit would cost taxpayers £3.5bn a year.
Although mansion tax has been proposed as a 1 per cent tax on properties valued at £2 million or more, there is an expectation that this tax could be set much lower, at a maximum of £5,000, due to concerns about the London housing market.
Gambling tax could cost up to £3.2bn a year, according to some estimates, which campaigners such as Mr Brown believe would fund an end to restrictions on child benefits.
The Treasury last week said the U-turn on income tax rise was due to better-than-expected forecasts from the Office for Budget Responsibility, with the black hole in spending believed to be around £20bn, well below the initial forecast of £40bn.
But Ms Reeves needs to make sure she has an economic buffer beyond the £10bn she gave herself last year due to the potential for further economic shocks from Donald Trump’s tariffs, market uncertainty and the impact of war.
It also needs to raise cash to meet its defense spending target of 2.5 percent of GDP.
Economists have warned that the only sustainable way to do this is to increase income tax, VAT or workers’ national insurance contributions, which are major taxes.
But the chancellor is set to ignore that advice and push for so-called wealth taxes instead.
He has already stated that revoking non-Dom status and introducing VAT on private school fees brought in more money than initially anticipated, despite intense criticism of both moves.
But critics warned the measures would destabilize the tax system and alienate wealthy individuals.
