The Labour manifesto never did add up.
On the one hand, Keir Starmer vowed there would be “no return to austerity” under his government, while also insisting he had “no plans” to raise taxes beyond an £8bn raid on private equity, oil and gas companies, private school fees and non-doms to pay for more teachers and NHS appointments.
Follow live: All the latest on budget day
In reality, whoever won the election faced tens of billions of pounds in tough choices over tax and spending. But instead of levelling with us, the two main parties embarked in a “conspiracy of silence” in order to win votes.
Today, the truth will out, in a budget which will define Sir Keir Starmer’s first term in a way his manifesto did not.
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What to expect from the budget
There will be huge tax rises and there will be changes in the fiscal rules to allow the chancellor to borrow more to invest in Britain’s crumbling infrastructure.
And we will finally find out which “working people” are the ones Sir Keir Starmer wants to protect as small and big businesses, property owners, shareholders – and perhaps “Middle England” too – braces itself for tax rises, and the government braces itself for the fall-out.
The prime minister set the hare running on who’s in the firing line for tax rises last week at the Commonwealth Heads of Government summit in Samoa when he told me “working people” were those who “go out and earn their living, usually paid in a sort of monthly cheque” but they did not have the ability to “write a cheque to get out of difficulties”.
He told me explicitly that “working people” who also owned assets, such as property or shares, did not fit his definition.
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Sky News questions Starmer on tax rises
So business owners, property owners and Middle England do have some cause for alarm.
The pledge to “not increase national insurance, the basic, higher, or additional rates of income tax, or VAT” has been tweaked in recent weeks to a promise to “protect the payslips of working people”.
Employers are expecting an increase in national insurance contributions they must pay on wages – many will argue this is a flagrant breach of a manifesto pledge.
In another blow to employers, but a win for those struggling on low wages, Labour have also announced a 6.7% increase in the National Living Wage for over three million workers next year, amounting to a pay boost worth £1,400-a-year for an eligible full-time worker.
Is this the moment the manifesto is revealed as a sham? Labour insiders insist not and point, again, to the “£22bn black hole” in the current financial year they discovered when their took office – and which ratchets up to a £40bn gap in the public finances over the course of the parliament – that they now have to plug.
Politically, they hope to blame the big tax rises and borrowing on the economic inheritance left to them by the Tories and buy some space with voters.
As one senior government figure put it to me: “The scale of the economic inheritance is bigger than thought and it has blown a political and economic hole in our first few months.”
This will be a message Rachel Reeves will want to land at the despatch box on Wednesday.
But a public disillusioned with politicians might not see it like that as they watch a Labour chancellor, flanked by a prime minister who promised the opposite in the election, embark on a massive round of tax rises that but months ago they were told were not coming down the tracks.
Ms Reeves is set to deliver the budget from 12.30pm. Pic: Treasury
Insiders acknowledge this is going to be a tax and spend budget that goes far beyond what we were told to expect when Labour were asking for votes.
But they hope what they can do with this big moment is to take it beyond the winners and losers and frame this first Labour budget in over 14 years as “forging a new settlement” for the people and the country.
To that end, this will be the “fixing the foundations and change” budget: “This is a new economic settlement from a government willing to investment and, in particular, borrow to invest, and that is a change and it will show a path towards long term growth.”
Ed Conway analysis:
Could budget’s ‘jiggery-pokery’ scare investors?
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Because, as we drill into who is a working person, and who is going to be hit with tax raises in this budget, there will also be a big story about billions of investment in our country’s energy and transport infrastructure, into housing and hospitals and schools.
“If we get it right, on the evening of the budget, we want to be able to show that we protected your pay slip, are fixing the NHS and investing to rebuild Britain,” one senior figure explains. “What’s the alternative? Choice is going to feature very heavily in the chancellor’s speech. We have made our choices and we are asking business and the wealthiest to pay a bit more to grow our economy and protecting working people.”
And this new settlement, when it lands, will be massive. Rachel Reeves intends to change her borrowing rules to allow up to £53bn more in borrowing to be spent on public services and infrastructure.
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Trailing the decision at the International Monetary Fund summit in Washington last week, the chancellor said she was making the change in order to take opportunities for the economy “in industries from life sciences to carbon capture, storage and clean energy to AI and technology”, as well as using borrowing to “repair our crumbling schools and hospitals”.
The danger for the chancellor is that what actually comes out the other side is anger over tax rises not flagged in the manifesto, or accusations that the government is being Janus-faced if it claims it’s protecting working people should it also, as speculated, extend the freeze on income tax thresholds beyond the 2028 deadline set by the last government, which would drag millions of workers into higher tax bands (and raise as much as £7bn a year for the government).
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Will there be ‘budget nasties?’
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How might the middle classes and wealthier voters respond to their incomes being squeezed? And how might businesses respond to being asked to pay billions more in taxes from a government that has been banging on about being pro-business for months?
It is going to be a difficult sell, no doubt. But this government is calculating that short-term pain now will translate into gains in the medium to long term if Reeves can pull it off and kick-start economic growth.
The hope is that come the next Labour manifesto, the pledges on the NHS, economy, better housing and jobs have been met and the public can forgive the tax rises foisted on them to get there.
Starmer talked endlessly about it being a change election and it will be this budget, not his manifesto, that proves the point.
Is there method to the madness? Donald Trump and his acolytes would have you believe so.
The US president is standing firm among all the market chaos.
Just this weekend, after US stock markets suffered their sharpest falls since the onset of the pandemic, Trump reposted a video on his social media platform Truth Social. This was its title: “Trump is purposefully CRASHING the market.”
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The video claimed the president was engineering a flight to US government bonds, also known as treasuries – a safe haven in turbulent times. The video suggested Trump was deliberately throwing the stock market into chaos so investors would take their money out and buy bonds instead.
Why? Because demand for treasuries pushes up the price of the bonds, and that, in turn, lowers the yield on those bonds.
The yield is the interest rate on the debt, so a lower yield pushes down government borrowing costs. That would provide some relief for a government that has $9.2trn of government debt to refinance this year. Consumers also stand to benefit as the US Federal Reserve, the US central bank, would likely follow suit, feeling the pressure to cut interest rates.
A trader works on the floor at the New York Stock Exchange. Pic: Reuters
Trump and his treasury secretary, Scott Bessent, have made it a key policy priority to lower yields. For a while, it looked like the plan was working. As stock markets tumbled in response to Trump’s tariffs agenda, investors ploughed their money into bonds instead.
However, Trump may have spoken too soon. On Monday, the markets had a change of heart and rapidly started selling government bonds. Thirty-year treasury yields hit 4.92% on Wednesday, their biggest three-day jump since 1982. That means government borrowing costs are rising – and not just in the US. The sell-off has spiralled to government bonds worldwide.
Rachel Reeves will be watching anxiously. Yields on Britain’s 30-year government bonds, also known as gilts, hit their highest level since May 1998. They registered a 27 basis point jump to 5.642% today – that’s on track to be the largest one-day move since the aftermath of former prime minister Liz Truss’ “mini-budget” in October 2022.
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‘These countries are dying to make a deal’
This is a big deal. It is the sharpest sell-off in the US bond market since the pandemic. Back then, investors also rushed into bonds before dumping them and the motivations, on one level, are similar.
In 2020, investors sold bonds because they had to cover losses elsewhere in their portfolios. When markets fall, as they have done over the past few days, lenders can demand that an investor who has borrowed money stump up more cash against the value of their loan because the collateral against those loans has fallen in value. This is known as a “margin call”. Government bonds are easy to sell as investors “dash for cash”.
There are signs that this may be happening again and central banks, which had to step in last time, are alert.
The Bank of England warned today of the growing risks to financial stability. “A sharp increase in government bond yields could crystallise relatively quickly,” it said.
There are other forces weighing on government bonds. With policy uncertainty unfolding in the US, investors could also be signalling that US debt isn’t the safe haven it once was. That loss of confidence also seems to have hurt the dollar, one of the world’s safest places to park your money. It’s had a turbulent journey but is down 1.15% against a basket of safe haven currencies since Trump announced widespread tariffs on 2 April.
Some are even wondering if China could be behind some of this, dumping US government debt as a revenge tactic to hurt a president who has explicitly said he wants bond yields to come down. The country holds $761bn of US government bonds, second only to Japan. If this is the case, then the US-China trade war could rapidly be evolving into a financial war.
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