Chancellor to signal higher taxes and “fair but tough” decisions in upcoming Labour budget

Rachel Reeves will on Tuesday deliver a candid speech paving the way for potential tax rises in her first budget as chancellor, signalling that Labour may break its key election pledge not to raise income tax, VAT or national insurance.

Speaking as markets open, Reeves is expected to warn that tough decisions are necessary to restore the economy and fund public services, while pledging that her approach will be rooted in “fairness and opportunity”. Although she will stop short of confirming specific measures, her refusal to repeat Labour’s no-tax-rise promise will be widely interpreted as preparation for higher taxes on wealth and higher earners.

The speech comes after Keir Starmer told Labour MPs on Monday evening that the upcoming budget would be “built on Labour values,” focused on protecting the NHS, reducing national debt and easing the cost of living. Starmer hinted at the reasoning behind a possible manifesto breach, blaming what he called “the long-term impact of Tory austerity, their botched Brexit deal and the pandemic on Britain’s productivity”.

Starmer told MPs there would be “tough but fair” choices, contrasting Labour’s strategy with the “return to austerity” he claimed the Conservatives and Reform UK would pursue. While some MPs pressed him on whether the budget would scrap the two-child benefit cap, no one directly confronted him about a potential tax reversal — a sign that resistance within the parliamentary Labour party may be limited for now.

According to senior officials, both No 10 and No 11 Downing Street have been carefully preparing the ground for major fiscal changes. Ministers believe that signalling reforms early will help avoid market shocks, citing last year’s successful rollout of investment rule changes and a national insurance rise for employers, which were controversial but well-managed.

The fiscal landscape remains tight despite a slightly improved economic outlook. Treasury sources say the Office for Budget Responsibility’s productivity downgrade has created a “serious headache”, but note that falling debt interest costs and a stronger labour market may soften the blow. Some officials are also encouraged by modest interest rate cuts and better-than-expected retail sales.

“It’s a tough backdrop, but we’re going to be honest with people about the choices,” one Treasury ally said. “And there are some reasons for optimism.”

Reeves’s budget, due later this month, is expected to focus heavily on cost-of-living support. Measures under consideration include cutting VAT on domestic energy bills and easing green levies. She is also reportedly weighing reforms that could redistribute the tax burden more fairly — such as increasing income tax for top earners while lowering national insurance for workers.

The influential Resolution Foundation has proposed a 2p rise in income tax offset by a 2p cut in national insurance, a move that could raise £6bn largely from pensioners and landlords, who do not pay NI. The thinktank also suggested extending the income tax threshold freeze, raising dividend tax, and closing capital gains loopholes — a package worth up to £26bn.

Former Resolution Foundation chief Torsten Bell, now a government minister, is said to be advising Reeves directly as part of the budget board, reinforcing the alignment between Labour’s fiscal strategy and thinktank recommendations.

Within the Treasury, aides acknowledge that the chancellor is determined to “give herself breathing room” and end the pattern of short-term fiscal fixes. Reeves is believed to be seeking to double her limited fiscal headroom while still finding funds to protect NHS capital spending and potentially ease the two-child benefit cap.

At Downing Street, the biggest concern remains political rather than economic: the potential fallout from breaking a manifesto pledge. “If we go down this road, we must show people tangible benefits,” one minister said. “They need to see that higher taxes mean better public services, lower bills or real improvements in daily life.”

Another government source warned against messaging focused on bond markets or debt management. “That language kills us,” they said. “People need to hear what they’re getting for their money.”

In her speech, Reeves is expected to strike a tone of honesty and stability, promising to “make the choices necessary to deliver strong foundations for our economy” while emphasising Labour’s core values of fairness and responsibility. “These are important choices that will shape our economy for years to come,” she will say. “It’s vital that people understand the circumstances we face and the principles guiding my decisions.