Rachel Reeves has refused to rule out tax rises in this month’s budget, insisting she must “deal with the world as I find it, not the world as I might wish it to be”.
The UK chancellor foreshadowed an income tax increase, a breach of Labour’s manifesto commitment, as a result of the public finances being in a worse state than expected after “years of economic mismanagement”.
In an early-morning Downing Street press conference, Reeves said that “each of us must do our bit” for the country’s future. “If we have to build the future of Britain together, we will all have to contribute to that effort,” she said.
“As chancellor, I have to face the world as it is, not the world that I want it to be. And when challenges come our way, the only question is how to respond to them, not whether to respond, or not,” she told reporters.
In a speech intended to frame the tough choices about tax in the budget, Reeves said the economic challenges facing the UK – including global tariffs, sticky inflation, volatile supply chains and defence spending – had got worse since last year’s financial statement.
“I put our public finances back on a firm footing, provided an urgent cash injection into faltering public services and began rebuilding our economy. But since that budget, the world has thrown even more challenges our way,” she said.
Reeves said she would not duck the difficult choices ahead, even if they broke her pledge not to put up income tax, VAT or national insurance. She said: “I could do what previous governments have done, which is to sweep those challenges under the carpet, to cut capital spending, to make the numbers up.
“But then we’d be back here in a year, in five years’ time, with productivity still on its knees, growth underperforming, national debt continuing to rise. So I’m being honest with people.”
The chancellor accused previous governments of putting “political convenience” ahead of “economic imperative”, raiding capital budgets intended to support the public services to balance the books. She dismissed Reform UK’s plans as “fantasy” economics.
“The problem of the last 14 years is that political expediency always came above the national interest. And that is why we are in the mess that we are in today,” she added.
Pressed on Labour potentially breaking its manifesto commitment on tax, she insisted she had “got to do the right thing”, even if it proved unpopular.
Reeves said her budget would “focus squarely” on the priorities of the British people: the NHS, easing the cost of living and reducing national debt.
“You will all have heard a lot of speculation about the choices I will make. I understand that – these are important choices that will shape our economy for years to come.
“I want people to understand the circumstances we are facing, the principles guiding my choices – and why I believe they will be the right choices for the country.”
She said the government would again attempt welfare reform, after plans to overhaul the system were blocked by Labour MPs earlier this year. “There is nothing progressive about refusing to reform a system that is leaving one in eight young people out of education, or employment,” she said.
Reeves rejected calls from the left to “sidestep” her fiscal rules and raise borrowing, adding: “No accounting trick can change the basic fact that government debt is sold on financial markets. The more that we try to sell, the more it will cost us. It is important that everyone, the public and politicians understand that reality.”
Speaking shortly after Reeves’s press conference, Kemi Badenoch accused the chancellor of overseeing “a masterclass in managed decline”, and accused her of avoiding all responsibility for tax rises.
“It is utterly ridiculous to see Rachel Reeves stand there blaming everybody except herself,” the Conservative leader said. “Unemployment has risen every single month since Labour came into office, but she wants to blame me for that. That’s crazy.”
Reeves, Badenoch said, didn’t have a plan: “If she had a plan, she would be talking about what she was going to do other than tax rises. All she’s doing is blaming everyone else. This is a chancellor who’s back against the wall. She doesn’t know what she’s doing.”
The cost of UK borrowing fell slightly as the chancellor reiterated her “iron-clad” commitment to her fiscal rules, reassuring the bond markets, during her speech.
The yield, or interest rate, in UK 10-year bonds dropped by 0.045 points to 4.39% on Tuesday morning, while the yield on 30-year bonds dropped by 0.05 points to 5.166%.
Senior strategists are understood to be heavily invested in “pitch-rolling” for the major changes before the budget, believing the key success of last year’s statement was that markets were not surprised by the changes to investment rules or the national insurance rise for employers, which, although controversial, were well trailed.
Some government insiders believe the economic landscape to be less gloomy than predicted. While they accept the Office for Budget Responsibility’s productivity downgrade has created a headache, they point out that a fall in debt-financing costs and more people coming into the jobs market may help limit the damage. Interest rate cuts and stronger-than-expected retail sales could also help.
The Guardian first reported last month that Reeves was considering raising income tax to help reduce a shortfall, expected to be between £20bn and £30bn, after a bigger than expected downgrade in productivity forecasts.