Rachel Reeves needs to “make the case” to voters that extending the freeze on personal income thresholds was the “fairest” way to increase taxes, Baroness Harriet Harman has said.

Speaking to Sky News political editor Beth Rigby on the Electoral Dysfunction podcast, the Labour peer said the chancellor needed to explain that her decision would “protect people’s cost of living if they’re on low incomes”.

In her budget on Wednesday, Ms Reeves extended the freeze on income tax thresholds – introduced by the Conservatives in 2021 and due to expire in 2028 – by three years.

The move – described by critics as a “stealth tax” – is estimated to raise £8bn for the exchequer in 2029-2030 by dragging some 1.7 million people into a higher tax band as their pay goes up.

The chancellor previously said she would not freeze thresholds as it would “hurt working people” – prompting accusations she has broken the trust of voters.

During the general election campaign, Labour promised not to increase VAT, national insurance or income tax rates.

Sir Keir Starmer has insisted there’s been no manifesto breach, but acknowledged people were being asked to “contribute” to protect public services.

He has also launched a staunch defence of the government’s decision to scrap the two-child benefit cap, with its estimated cost of around £3bn by the end of this parliament.

‘A moral failure’

The prime minister condemned the Conservative policy as a “failed social experiment” and said those who defend it stand for “a moral failure and an economic disaster”.

“The record highs of child poverty in this country aren’t just numbers on a spreadsheet – they mean millions of children are going to bed hungry, falling behind at school, and growing up believing that a better future is out of reach despite their parents doing everything right,” he said.

The two-child limit restricts child tax credit and universal credit to the first two children in most households.

The government believes lifting the limit will pull 450,000 children out of poverty, which it argues will ultimately help reduce costs by preventing knock-on issues like dependency on welfare – and help people find jobs.

Speaking to Rigby, Baroness Harman said Ms Reeves now needed to convince “the woman on the doorstep” of why she’s raised taxes in the way that she has.

“I think Rachel really answered it very, very clearly when she said, ‘well, actually, we haven’t broken the manifesto because the manifesto was about rates’.

“And you remember there was a big kerfuffle before the budget about whether they would increase the rate of income tax or the rate of national insurance, and they backed off that because that would have been a breach of the manifesto.

“But she has had to increase the tax take, and she’s done it by increasing by freezing the thresholds, which she says she didn’t want to do. But she’s tried to do it with the fairest possible way, with counterbalancing support for people on low incomes.”

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She added: “And that is the argument that’s now got to be had with the public. The Labour members of parliament are happy about it. The markets essentially are happy about it. But she needs to make the case, and everybody in the government is going to need to make the case about it.

“This was a difficult thing to do, but it’s been done in the fairest possible way, and it’s for the good, because it will protect people’s cost of living if they’re on low incomes.”

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The Office for Budget Responsibility has attracted huge criticism and anger from Chancellor Rachel Reeves, after mistakenly revealing the details of her budget hours before she delivered it.

But the watchdog already had its critics.

Liz Truss says she never realised how powerful the OBR was and that it should be abolished. And Sir Keir Starmer has criticised the OBR’s assessment of his government’s fiscal plans.

So how will the budget leak affect the OBR’s future? Niall Paterson talks to Ed Conway, Sky’s economics and data editor about exactly what the OBR is, whether it has too much power and if it will survive.

Producer: Emma Rae Woodhouse

Editor: Wendy Parker

Rachel Reeves has been accused of making the country’s economic situation appear in a worse state than it really was ahead of the budget.

A letter from the Office for Budget Responsibility (OBR), published on Friday, revealed it told the chancellor as early as 17 September that prevailing economic winds meant the £20 billion gap in meeting her self-imposed fiscal rule of not borrowing for day-to-day spending would actually be much smaller.

Later, in October, it informed her that the spending gap had closed altogether and the government would be running a surplus.

Wednesday’s budget, which increased taxes by more than £26bn, followed weeks of dire warnings from Ms Reeves that she would have to make “hard choices” to meet her tax and spending commitments.

This included an early morning news conference on 4 November, after the OBR told her the spending gap had closed, when she suggested she was likely to have to break a manifesto promise and raise income tax rates to secure the UK’s economic future.

Ms Reeves did not end up increasing income tax rates in the budget. But the chancellor did extend the freeze on income tax thresholds, in a move that her critics have described as a stealth tax.

Conservative leader Kemi Badenoch said the letter showed Ms Reeves had “lied to the public” and should be sacked.

But Downing Street denied she had misled the public and the markets in the run-up to the budget.

“I don’t accept that,” the prime minister’s spokesman said.

“As she set out in the speech that she gave here (Downing Street), she talked about the challenges the country was facing and she set out her decisions incredibly clearly at the budget.”

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The idea of a hike in income tax rates was dropped on 13 November after several weeks of being trailed, as the Treasury cited better than expected forecasts.

But the OBR suggested it had provided ministers with no new forecasting in November.

“No changes were made to our pre-measures forecast after October 31,” the fiscal watchdog’s letter to the Treasury Select Committee said.

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Ben Zaranko, an economist for the Institute for Fiscal Studies, queried the rationale behind the negative briefings ahead of the budget.

“At no point in the process did the OBR have the government missing its fiscal rules by a large margin. Leaves me baffled by the months of speculation and briefing,” he wrote on X.

“Was the plan to lead everyone to expect a big income tax rise, then surprise them on the day by not doing it?”

Ms Badenoch said: “Yet more evidence, as if we needed it, that the chancellor must be sacked. For months Reeves has lied to the public to justify record tax hikes to pay for more welfare.

“Her budget wasn’t about stability. It was about politics: bribing Labour MPs to save her own skin. Shameful.”

Ms Reeves’ Tory counterpart, shadow chancellor Sir Mel Stride said the downbeat briefings were “all a smokescreen”.

“Labour knew all along that they did not need to raise taxes and break their promises,” he said.

“It was an active choice to do so, to fund a huge increase in welfare spending. The OBR have now made that very clear.

“It appears the country has been deliberately misled.”