Rachel Reeves to deliver ‘fixing the foundations and change’ budget – but it’ll be a difficult sell
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.
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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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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.”
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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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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.
Ford’s UK boss has called on the government to provide consumer incentives of up to £5,000 per car to boost demand for electric vehicles and help the industry hit challenging climate targets.
Lisa Brankin, chair of Ford UK & Ireland, told Sky News that direct support for consumers to purchase zero-emission vehicles is crucial if the industry is to remain viable and hit challenging net zero milestones.
Last week, amid increased industry pressure, the government launched a “fast-track” review of its Zero Emission Mandate (ZEV), which sets targets for the proportion of new vehicles that must be electric – set at 22% this year for cars and 10% for vans.
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Manufacturers say those targets are unrealistic, and a £15,000 fine per non-compliant vehicle is too harsh. Vauxhall owner Stellantis cited the ZEV as a factor in the closure of its Luton plant announced last week.
Speaking at Ford‘s Halewood plant on Merseyside at the launch of the Puma Gen-E, the electric version of its best-selling small SUV, Ms Brankin said consumer demand has fallen far below that envisaged when the mandate was set.
“The mandate is a really aggressive trajectory to 2030 and the phase out of new petrol and diesel vehicles. For us to get a return on our investment as a manufacturer – we have spent £380m here [at Halewood] and £2bn in Cologne – we need and want to sell electric vehicles. The problem is customers are not moving as we would want.
The electric van and Puma use the power unit produced on Merseyside. Pic: Ford
“The number one thing we want is direct customer incentives, perhaps a scrappage scheme, we have been calling for a cut in VAT on electric vehicles. Something that will incentivise customers to buy EVs, and incentivise the van and car sales that we badly need in the UK.”
Asked if the incentives would need to be in the order of £2,000-£5,000 to be effective, she said: “That is a good question, but it would need to be in that region. It will need to be substantial.”
The Puma Gen-E is significant for Ford because it is the company’s smallest and cheapest EV, with a starting price of just under £30,000, bringing it closer to mass market reach than its existing models.
The Halewood plant has just begun making the Gen-E power unit, used in both the Puma and the E-Transit Custom, the electric version of Ford’s 60-year-old commercial vehicle. They say it will now power Britain’s best-selling car and van.
It comes as the entire European car industry faces challenges in the transition away from internal combustion, including softening consumer demand, stiff Chinese competition and the threat of tariffs from the incoming second Trump administration.
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Ms Brankin defended Ford’s move into electric vehicles, a transition that thus far has failed to replicate its former dominance of the UK market for petrol and diesel vehicles.
She also said state support for its UK plants at Dagenham in Essex and Halewood was dwarfed by the company’s investment.
“The support we’ve had from the government is still far below the amount that we’ve poured into our business to make the EV transition. And for us to have a sustainable business it’s important that it’s profitable for us going forward if we are going to protect the jobs we’ve already created.
“We have got a really good range of electric vehicles, we are just not seeing customers making the switch as fast as we would want them to.”
The Office for National Statistics (ONS) has admitted efforts to overhaul unreliable data on Britain’s jobs market may not be ready until 2027.
The ONS confirmed it is now “unlikely” it will be able to introduce a revamped version of its Labour Force Survey (LFS) – which is the official measure of employment and unemployment in the UK – by mid-2025, leaving policymakers in the dark over the true state of the UK workforce.
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Governor of the Bank Andrew Bailey said it was “a substantial problem” that the exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.
While the labour market is going to be “the key” to future rate cuts, another member of the interest rate decider Professor Alan Taylor told the MPs of the Treasury Committee last month: “We don’t necessarily have the best statistics there.”
The government too has built policy around the belief that the UK has a high number of people out of work and not looking for work.
Just last week the government announced £240m for reforms to “get Britain working”.
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But on the same day, the Bank’s chief economist said labour force participation “has now reached the point where participation is broadly in line with a natural level it should be”.
The UK had been thought to be an outlier compared to its neighbours in that the number of people in work is lower than before the COVID-19 pandemic.
Respected thinktank the Resolution Foundation had also said that there was no rise in inactivity based on HM Revenue & Customs data and that employment had been underestimated by 930,000 since 2019.
Also revised due to changes in population is the employment estimate, which is 0.1% higher than first thought, the ONS said.
The ONS said it continued “to advise caution when interpreting changes” in things like unemployment and economic inactivity.
More than a year ago in October 2023, the ONS temporarily suspended publication of its official labour force survey due to low response rates after the pandemic and began releasing experimental estimates that relied on tax and other data sources.
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