Reeves preparing to break manifesto pledge at Budget

Rachel Reeves will indicate she is prepared to break Labour’s manifesto promise not to raise income tax.

In a rare pre-Budget press conference on Tuesday, the Chancellor will insist she will take the “necessary” steps to right public finances for “years to come”.

The Treasury has not knocked down speculation that an increase in income tax rates – potentially by as much as 2p – is being considered in her Budget on Nov 26 to fill a financial black hole.

Ms Reeves will address this speculation head on, insisting she has to make “important choices” for the economy.

It comes after the Prime Minister’s official spokesman repeatedly refused on Monday to stand by Labour’s pledge last summer not to increase income tax, National Insurance or VAT.

It is unusual for the Chancellor to hold a press conference three weeks before revealing Budget measures.

Those briefed on the speech were insisting that Ms Reeves would be outlining big-picture arguments rather than revealing policy decisions, but they kept tight-lipped on details.

A breach of the manifesto would be a huge political gamble. In 1993, Lord Lamont increased taxes to stabilise the economy, just a year after the Conservatives had promised not to do so. He later conceded it contributed to the Tories losing the 1997 election.

Sir Nick Clegg also inflicted severe electoral damage to the Liberal Democrats during the coalition government by breaking a manifesto pledge when he voted for a tuition fees rise.

‘Strong foundations’

Ms Reeves has been practising for the early morning speech since last week, as details of her diary, captured by photographers last Wednesday, revealed.

She is expected to say: “Later this month, I will deliver my second Budget as Chancellor.

“At that Budget, I will make the choices necessary to deliver strong foundations for our economy – for this year, and years to come.

“It will be a budget led by this Government’s values, of fairness and opportunity and focused squarely on the priorities of the British people: Protecting our NHS, reducing our national debt and improving the cost of living.

“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.

“But it is important that people understand the circumstances we are facing, the principles guiding my choices – and why I believe they will be the right choices for the country.”

Her references to taking “necessary” steps and putting the public finances on a more stable footing for “years to come” appear to be laying the groundwork for tax rises.

The comment about “fairness” also chimes with other indications from the Treasury that the wealthy are in line for tax increases.

Allies of the Chancellor have said she has decided to increase her fiscal headroom – money kept back to make sure her borrowing rules are hit – compared to recent years.

Keeping back more than the £10bn in place after the 2024 Autumn Budget and 2025 Spring Statement, perhaps even doubling it, as some allies have hinted at, would require bigger tax rises.

On Monday night, Sir Keir Starmer told Labour MPs the Budget would be “tough but fair” and claimed the Conservative and Reform UK plans to cut spending would amount to a return to austerity. 

Manifesto break

Last week at Prime Minister’s Questions, Sir Keir noticeably dropped his position that the Labour manifesto still “stands” , ramping up speculation a break is being considered.

The key line about tax in the manifesto read: “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of income tax, or VAT.”

The Telegraph reported last week that those drawing up the Budget are seriously looking at increasing income tax rates by 2p. However, at the same time employees’ National Insurance would be cut by 2p.

That move would allow Downing Street to mount an argument that the manifesto pledge was being kept because 30 million workers would not face a tax rise.

However, it would be a tax raid on pensioners and landlords, who pay income tax but not National Insurance, and raise an estimated £6 billion overall.

Figures in No 10 and the Treasury have grown exasperated by public speculation on which tax measures could be taken, insisting some of it is inaccurate.

Higher council tax bills for expensive homes are being looked at, according to reports over the weekend, while speculation persists about Capital Gains Tax and potential pension changes.

Many different options are being explored with the Budget still three weeks out, with final decisions only to be locked in as the official economic and fiscal forecasts become clearer.

Commentators have noted it remains possible that the Treasury is managing expectations by allowing the possibility of a manifesto breach to air, only for it to be ruled out on the day, allowing Downing Street to argue the tax rises are less severe than predicted.

Softening the blow

The Resolution Foundation, a Left-leaning economic think tank, has suggested in a new report that forecasts of the public finances may not have deteriorated as much as claimed since the spring.

The think tank says that stronger-than-expected pay growth could give Ms Reeves an extra £13bn to play with, softening the blow of higher debt interest payments and other worsening indicators.

Kemi Badenoch, the Conservative leader, will use her own speech on Tuesday to question why the Government is not doing more to control the ballooning welfare budget.

Mrs Badenoch will reference how last week the Government said its reforms of the Personal Independence Payment (PIP), paid to people with disabilities, would not reduce the overall welfare bill despite soaring estimates in the years ahead.

The Tory leader will say: “Earlier this year, Labour backbenchers celebrated when they managed to pass legislation guaranteeing that the sickness benefits bill would rise to £100bn a year.

“Labour has given up. They have given up making savings on welfare altogether in the Timms Review (into reforming PIP).

“Just as their own internal assessments are now warning that the cost of PIP payments will continue to spiral out of control. The deficit is set to double thanks to decisions this weak Labour Government are taking.”

Mel Stride, the Conservative shadow chancellor, said: “It’s taken Rachel Reeves more than a year to admit her first Budget was a failure. Now, with an emergency press conference, she is all but confirming what many feared – higher taxes are on the way.

“If Rachel Reeves breaks her promises yet again, Keir Starmer must take responsibility and sack her. The country needs a Chancellor with a plan and a backbone.”

[Source: Daily Telegraph]