(Bloomberg) -- Keir Starmer replaced his top aide and the Treasury acknowledged that key tax-raising plans were under review, as the Labour government tried to correct course from what even allies say has been a rocky three months in power.
In an attempt to end the turbulence engulfing Britain’s first Labour administration in 14 years, the prime minister on Sunday moved his chief of staff Sue Gray out of her role following internal complaints about the political operation she ran at 10 Downing Street.
The dramatic move came as doubts hung over Labour’s fiscal plans just three weeks before a make-or-break budget, with officials admitting they were examining three tax proposals amid concerns that they were either unworkable in their current form or would end up costing rather than generating money. The developments reinforced a sense that Starmer and his team are struggling to make the transition from opposition to government.
“In recent weeks it has become clear to me that intense commentary around my position risked becoming a distraction to the government’s vital work of change,” Gray said in a statement released by Downing Street, announcing her new role as a link between Starmer and the devolved nations and regions. She was replaced by Morgan McSweeney, who masterminded Labour’s successful election campaign, in a shake-up that included four separate appointments.
“Number 10 has been politically underpowered with too few special advisers,” said John McTernan, who advised former Labour prime minister, Tony Blair, and is now a strategist for communications firm BCW Global. “There has been no grip. The reset means there will now be a political project driven by a strong political narrative and purpose.”
Infighting
Gray, a former civil servant who led a review into Covid lockdown parties in Boris Johnson’s government, had become the focus of bitter infighting. As the most senior aide in charge of Starmer’s political team, she was responsible for day-to-day operations and the management of other aides. But as both Labour’s and Starmer’s poll ratings plummeted in recent weeks following allegations of cash-for-access and a controversial proposal to remove heating subsidies from pensioners, privately her colleagues within government became increasingly critical of her judgment and leadership style.
Gray was also seen as personally involved in the level of access awarded to Waheed Alli, a Labour donor and close associate of hers who sparked weeks of controversy when it was reported he had been given a pass to Downing Street after the party’s landslide election win in July.
Downing Street aides told Bloomberg they were pleased that Gray had gone and that they were optimistic the new team would provide a clearer political direction and better-defined strategy to their operation, speaking on condition of anonymity discussing internal appointments.
Starmer and Chancellor Rachel Reeves must now turn their attention to a budget on Oct. 30 that is already coming under strain, with the viability of more than half the revenue that Labour planned to raise to fix Britain’s public services now being questioned.
Plans to impose value-added tax on private school fees, announced in Labour’s election manifesto and due to come into force in January, may have to be delayed to prevent administrative problems, aides said, confirming a report in the Observer newspaper on Sunday.
Reeves is also reconsidering a planned overhaul of the UK’s tax regime for non-domiciled foreigners, looking at different policy options to maximize the tax take after suggestions it would spark a wealth exodus and end up losing money for the Treasury.
Further proposals to close a loophole on carried interest — private equity fund managers’ portion of profits on asset sales — are being looked at again after internal Treasury analysis showed they too could end up costing the exchequer money.
Warnings that the tax on carried interest could be raised to 45% from the current level of 28% spooked many top financiers across the City. The private equity firm General Atlantic has warned the government that dozens of dealmakers in London could leave if plans for higher taxes on carried interest go ahead. The hedge fund billionaire Alan Howard is considering a move to Geneva from London. Jeremy Coller, a pioneer of Britain’s private equity sector, has already left for Switzerland. While Reeves still intends to close the loophole, she is now reviewing her approach to maximize the revenue raised.
Together, the three tax commitments were meant to raise about £4.8 billion out of £8.6 billion in total, with the proceeds going to fund among other things 6,500 new teachers, 40,000 more operations, scans and appointments for the health service every week, and 8,500 new mental health staff, according to a costings document published by Labour alongside its manifesto.
Doubts over those costings will bring questions for Reeves and Labour in the coming days over how much money the tweaked policies will generate, whether that will be enough to pay for those manifesto commitments, and how else they might be funded.
In her budget, Reeves is expected to raise other taxes such as capital gains tax, as well as announce spending cuts and alter her fiscal rules to allow growth-enhancing investment. She and Starmer have recently tried to soften their message after repeated warnings about the “painful” steps needed to fill a £22 billion ($28.9 billion) hole in the public finances triggered a sharp fall in consumer and business confidence.
The shake-up in Downing Street will do little to dispel accusations that, after campaigning on promises of change and stability after years of chaos under the Conservatives, Starmer has so far been unable to demonstrate he’s running a steady ship.
--With assistance from Jenny Surane.
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