Budget will be 'fair' says Reeves as tax rises expected

Chancellor Rachel Reeves has said she will make "necessary choices" in the Budget after the "world has thrown more challenges our way".

In an unusual pre-Budget speech in Downing Street, Reeves did not rule out a U-turn on Labour's general election manifesto pledge not to hike income tax, VAT or National Insurance.

When journalists explicitly asked if the government was set to break that pledge she did not answer directly but said she was "setting the context for the Budget".

Shadow chancellor Sir Mel Stride said the "emergency" speech confirmed "the fears of households and businesses - that tax rises are coming." He added that if Reeves "breaks her promise and hikes taxes again, she must go".

Reeves pledged to come up with a "Budget for growth with fairness at its heart" aimed at bringing down NHS waiting lists, the national debt and the cost of living.

The chancellor said she would do what was "necessary to protect families from high inflation and interest rates, to protect our public services from a return to austerity" and ensure the economy is "secure with debt under control".

She added that "we will all have to contribute to that effort".

"Each of us must do our bit for the security of our country and the brightness of its future."

The chancellor's speech appears to have removed any doubt over whether taxes will rise in the Budget.

Yet when pressed on which taxes might go up, Reeves refused to go into specifics.

Instead she began the work of explaining why a year after delivering a tax-raising Budget and vowing not to come back for more, she is in fact coming back for more.

The chancellor said she would do what is necessary, not what is popular.

The reasons she gave were poor productivity, for which she blamed Conservative government policy including Brexit, austerity and short-sighted decisions to cut infrastructure spending, persistently high global inflation and the uncertainty unleashed by Donald Trump's tariffs.

In short, Reeves' argument is that the failings of others are being visited upon this government, and that it falls to her to confront decisions her predecessors ducked.

"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," she said.

Daisy Cooper, Treasury spokesperson for the Liberal Democrats, said: "It's clear that this Budget will be a bitter pill to swallow as the government seems to have run out of excuses."

The government's official forecaster, the Office for Budget Responsibility (OBR), is widely expected to downgrade its productivity forecasts for the UK at the end of the month. That could add as much as £20bn to the amount the chancellor will need to find if she is to meet her self-imposed "non-negotiable" rules for government finances.

The two main rules are:

Reeves said in her speech on Tuesday that her commitment to her fiscal rules was "iron-clad" and gave her clearest sign yet that she wants to increase her room for manoeuvre against shocks.

"There is a reward for getting these decisions right to build more resilient public finances with the headroom to withstand global turbulence, giving business the confidence to invest and leaving government freer to act when the situation calls for it," she said.

The pound fell to a seven-month low against the dollar in the wake of Reeve's speech, hitting $1.31 at one point.

That was the lowest since early April, when US trade tariffs shook global markets.

However, it had already been heading downwards, and analysts said it was partly driven by the dollar's rising value.

Key measures of UK government borrowing costs also fell after the chancellor took to the lectern but have since risen slightly above the level they were at just before she started speaking.

After the last Budget Reeves had £9.9bn of headroom, but the Resolution Foundation said subsequent policy U-turns and changes in the economic outlook have turned that into a £4bn black hole.

The group urged Reeves to double the level of headroom to £20bn in order to "send a clear message to markets that she is serious about fixing the public finances, which in turn should reduce medium-term borrowing costs and make future fiscal events less fraught".

Last month, the Institute for Fiscal Studies (IFS) said there was a "strong case" to increase fiscal headroom.

The think tank said the lack of a bigger buffer created instability, and could leave the chancellor "limping from one forecast to the next".