Reeves signals manifesto-busting Budget will hike taxes

Rachel Reeves has all but admitted Labour’s manifesto pledge not to hike income tax will be ditched in her Budget.

The Chancellor said sticking to the election promise not to increase taxes for working people could only be met with “deep cuts” to public investment, which could derail hopes of future economic growth.

Sir Keir Starmer’s landslide election win was built on a promise not to increase income tax, employees’ national insurance or VAT but Ms Reeves looks set to break that pledge.

She said instability around the world fuelled by Donald Trump’s tariffs and the war in Ukraine, along with an unexpected downgrade in economic growth forecasts from the budget watchdog, would force her to take difficult decisions in the November 26 Budget.

She told BBC Radio 5 Live: “I will set out the choices in the Budget.

“It would, of course be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending and the reason why our productivity and our growth has been so poor these last few years is because governments have always taken the easy option to cut investment – in rail and road projects, in energy projects, in digital infrastructure.

“And as a result, we’ve never managed to get our productivity back to where it was before the financial crisis.

“So we’ve always got choices to make, and what I promised during the election campaign was to bring stability back to our economy, and what I can promise now is I will always do what I think is right for our country.”

Final decisions

She added: “We’re still going through the process at the moment of preparing the Budget measures.

“So those final decisions haven’t been taken yet, but as I take those measures, I will do what I believe is right for our country, and sometimes that means not always making the easy decisions, but the decisions that I think are in our national interest.”

Ms Reeves said the forecasts for economic growth would be downgraded because of the Office for Budget Responsibility’s revisions of the UK’s productivity.

She told BBC Radio 5 Live: “I have been really clear that we are looking at both taxes and spending as part of this Budget, a couple of things have influenced the budget situation this year.

“The first is that the independent forecaster, the Office for Budget Responsibility, has done a review of how productive the economy is.

“They’ll be very clear this is based on our productivity performance of the last few years under the last government, but they’re using it to make projections about productivity in the future, and that does mean lower growth, and we have to accommodate that, because we have to live within our means.”

Ongoing “conflicts and disruptions to trade” were hitting growth around the world, she added.

Tax hikes

But she also acknowledged her decision to hike taxes in her first budget, including an increase in employers’ national insurance contributions, had also had an impact.

She said: “I recognise that those decisions to increase taxes in the budget last year would have an impact on business and on the wealthiest whose taxes we increased.

“What I would say is doing nothing wasn’t an option.”

She said the measures had helped fund a drop in NHS waiting lists and had also provided the stability to the public finances which had allowed interest rates to fall.

The Chancellor indicated she will scrap the two-child benefit cap, saying there were “costs to our economy in allowing child poverty to go unchecked”.

She added: “In the end, a child should not be penalised because their parents don’t have very much money.”

Labour’s deputy leader Lucy Powell has warned that breaking the pledge not to raise income tax, national insurance or VAT would damage “trust in politics” and “we should be following through on our manifesto, of course”.

Ms Reeves said: “I think Lucy has been very clear since that interview that she stands alongside me and the decisions that I’ll need to make in that Budget.”