Reeves’s Budget has imploded. How did it all go so wrong?

As she stepped up to the podium, Rachel Reeves was about to take probably the biggest political gamble of her career.

The Chancellor, with Sir Keir Starmer’s support, was poised to shred Labour’s central manifesto promise.

“If we are to build the future of Britain together, we will all have to contribute to that effort,” she told the assembled Westminster press pack. “Each of us must do our bit for the security of our country and the brightness of its future.”

After weeks of speculation, the Chancellor was all but confirming that she would raise income tax, in defiance of a pre-election promise not to do so.

But less than a fortnight after she asked the public to put their faith in her judgment that such a step was necessary, that plan has been torn up.

On Thursday night, Treasury sources confirmed that the proposal to increase income tax rates had been junked.

Labour MPs who were asked to defend the Government are furious. The Chancellor’s credibility, already badly damaged by what many see as mishandling of the economy, may have been compromised beyond repair.

Graham Stringer, a critic of the Labour leadership from the back benches, seemed to sum up the mood: “The Government has made a complete Horlicks of it. They have seriously damaged their credibility more than they did with the last Budget.

“They’ve unsettled the markets and that will cost the country and the public. This Budget is critical to the future of the Labour Party. The process leading up to it has been a shambles.”

As Reeves held her press conference on Tuesday last week, the machinery of Government was working behind the scenes to prepare for her planned tax rise.

The Office for Budget Responsibility (OBR), the independent economic forecaster, was being told that the Treasury planned to raise income tax rates in the Budget on Nov 26.

The problem, as was all too clear in the questioning that followed in the briefing room at No 9 Downing Street that Tuesday morning, was it explicitly broke the manifesto.

Chris Mason, the BBC’s political editor, waved a copy of the election prospectus as the Chancellor watched on, reading out the key line that was about to be compromised.

“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.”

Ms Reeves would not say the pledge still stood. This Labour Government must do the right thing, not what is “popular”, she insisted. It was time for “all” to help fix the nation’s finances.

The Chancellor was battling more than just a political headache at the time. She had caught a bug and would end up pulling out of an internal meeting the next day. “She was not well,” said one by her side that week.

But the stakes were enough to make anyone’s stomach churn. It does not take a political genius to work out what usually follows a party willingly binning its manifesto pledges.

The Liberal Democrat MPs left standing in 2015 after Nick Clegg’s betrayal on tuition fees, who together could fit in two taxis, are testament to the wisdom of such moves.

But she knew all of this at the time of the announcement.

To understand why Reeves changed course, the curtain must be pulled back on discussions between Tuesday Nov 4 and Wednesday Nov 5.

The former was the first point the OBR was told by the Treasury of the “major measures” for the Budget. The latter was the second and final “major measures” submission, when the rates increase was dropped.

There is an economic reason for the about-turn and a political reason.

Firstly, the economic basis. The Chancellor had planned to announce a version of a “two up, two down” plan that had been floated by the Resolution Foundation in the summer.

The think tank’s proposal was to reduce National Insurance rates by 2p and increase income tax rates by 2p.

That would breach the manifesto: income tax rates would rise, something explicitly ruled out.

But it would also allow the Treasury to argue working people were being protected, since average workers would not suffer a tax rise. Only people who pay only income tax and not National Insurance – such as pensioners and landlords – would stump up more.

However, the move only raised a relatively small sum: £6bn according to the Resolution Foundation. Just increasing income tax alone would have raised much more money.

The Treasury included a version of this plan in the first major measures submission to the OBR. It is not known exactly what amount it was hoped would be raised.

But as the OBR crunched the proposals and changed estimates for the implications on tax revenues and economic forecasts, the numbers changed, according to Treasury insiders.

The OBR said the move would raise less money than expected, because the knock-on impact on tax receipts.

Wage growth stronger than expected

There were also improvements in other economic metrics.

Wage growth was proving to be stronger than had been expected, meaning that the Treasury was getting in more money on that front than had previously been believed.

It means that, broadly speaking, the hole in the public finances that Ms Reeves needed to fill was more like £20bn by the end of the decade rather than £30bn.

Whether the OBR was leant on to be more generous in its forecasts is unclear. Treasury figures had been pressing for policies like the legislation loosening planning rules and new trade deals to be scored by the OBR.

Treasury sources insisted this changing economic picture was responsible for Ms Reeves’s change of course. In their telling, she was simply being flexible.

“Suddenly you could see alternative ways,” said one Reeves ally, outlining the agreed narrative. “The income tax move became less of a lever that was a critical part of the package.”

But there was another consideration, in the endless balancing of pros and cons of the various options, weaved into all this: the politics.

After the Chancellor’s Downing Street press conference, Cabinet ministers in public did not rally to her side but talked up the importance of sticking by the manifesto pledges – the opposite of the Chancellor’s plan.

Lisa Nandy, the Culture Secretary, said on Sunday that promises should be taken “very, very seriously”.

Lucy Powell, who was dumped from the Cabinet by Sir Keir only to be voted back into a senior role as deputy Labour leader weeks later by a disillusioned membership base, went even further.

“It’s really important we stand by the promises that we were elected on and that we do what we said we would do,” she said. Translated: do not do what you are proposing.

Attempts were made to limit dialogue around the Cabinet table.

The Telegraph understands Cabinet ministers were not given the opportunity to openly debate the proposals when they gathered after Ms Reeves’s Downing Street press conference.

In fact, Sir Keir spoke in defence of the Chancellor. Ms Reeves outlined her arguments but then discussion was soon moved on to other topics, such as culture policy.

Downing Street’s endless polling on Budget measures would have picked up voter sentiment as the newspapers projected the manifesto breach on their front pages.

Earlier rounds had offered the team some ironic optimism: the electorate already believed they had already breached the manifesto promise by raising National Insurance last year.

Chancellor’s market influence

Did the Chancellor fear for her own career? She had been asked point blank by LBC’s Andrew Marr whether she would do the decent thing and resign if she raised income tax rates.

The answer was telling: the Chancellor argued the markets would baulk if that happened.

There was evidence to back up her case. Ms Reeves’s front-bench tears in the summer had sent gilt yields rising, perhaps fearing an even bigger spender could follow if she was replaced.

The Treasury was becoming aware of the OBR’s analysis of its initial plan late last week and over the weekend. It became official when the OBR sent updated forecasts this Monday.

Then, in the 48 hours between the OBR figures dropping and Ms Reeves abandoning the income tax rate rise on Wednesday, a new row broke out that set off alarm bells.

Senior Downing Street figures became aware that there was speculation the Prime Minister was under threat from a leadership coup, potentially in the wake of the Budget.

Morgan McSweeney, the Number 10 chief of staff, and senior Downing Street communication figures agreed to brief reporters that Sir Keir would fight any challenge.

The briefing, intended to be weaved into articles by columnists, ended up dominating the newspaper headlines and broadcast bulletins on Wednesday.

Wes Streeting, the Health Secretary, had been named as plotting against Sir Keir by some of the Prime Minister’s allies. No 10 figures denied those briefings came from them.

There had even been the extraordinary claim from one Starmer supporter that Mr Streeting was attempting to get 50 frontbenchers to resign en masse. Team Wes fiercely denied it.

Did the Prime Minister scare at the threat to his leadership and order Ms Reeves to pull back from the brink? No 10 and No 11 rejected the claim in unison on Friday.

They argued that the changes in the economic numbers were already becoming apparent over the weekend, and altering thinking, before the leadership briefing palaver broke out.

Yet the decision to get on the front foot and tell reporters the Prime Minister would contest any challenge does suggest a degree of concern for his position inside the bunker.

“The driver was the economics,” said one Downing Street figure of the about-turn. “But given the better situation, the political decision was ‘do we really need to do it?’ Obviously, politically a breach of the manifesto is a major thing.”

‘Major measures’ locked in with OBR

The Chancellor and the Prime Minister have now locked in the so-called “major measures” in their submission to the OBR. It is thought to include extending the freezing of the income tax rate thresholds for two more years.

Another move being speculated about on Thursday evening – actually lowering the point at which people enter a new income tax band – is understood not to be in there.

Instead, the Chancellor is looking at a wide number of smaller tax rises to raise the money needed.

She is said to still want to leave between £15bn and £20bn of fiscal headroom at the Budget, higher than the £10bn left after her statements last autumn and this spring, which disappeared amid worsening forecasts.

It looks likely that expensive homes face higher taxation. Individual tax raids on gambling and dividends have been in the plans for weeks. There is still time to make final decisions on smaller measures before Budget day.

Sizeable tax rises are still expected to raise most of the money needed, though there will also be some spending cuts in the package.

The Telegraph reported earlier this month that up to £5bn of spending cuts will be pencilled in for the end of the decade, with productivity improvements to be cited for the savings.

But what about the political cost? For a Labour Party below 20 per cent in the polls, has the back-tracking on income tax and the leadership mutterings really inspired confidence?

“I’m perplexed,” said one Labour MP. “Everything is changing yet again. From speaking to businesses, the one thing they want is stability, and this just feels chaotic. Consistent bad news is better than constantly changing around.”

Another said: “We are on 15 or 16 per cent in the polls and despite this there was speculation that she was going to break one of her promises. It’s welcome news that it’s been dropped, but I can’t understand what they were thinking of.”

Some of those sitting behind the Chancellor and the Prime Minister on the benches have started going public with their exasperation.

Clive Lewis, the Left-wing Labour MP, wrote on X: “This isn’t an economic strategy. It’s a stream of conflicting press releases held together by a spreadsheet. It doesn’t build confidence and it cracks the Chancellor’s own austerity-driven fiscal rules.”

The markets indeed seemed to agree. The cost of Government borrowing jumped and the FTSE100 sank in the early hours of trading as the news was digested in the City.

Reeves is perhaps not a natural gambler. The roll of the dice at her press conference last week may show why.

[Source: Daily Telegraph]