Every budget could be described, to a greater or lesser extent, as a high-stakes moment. Things can easily go badly wrong, as Gordon Brown discovered when he abolished the 10p tax rate in 2007, or George Osborne when his 2012 ‘omnishambles’ budget fell apart over pasties, and especially Kwasi Kwarteng, whose disastrous mini-budget of 2022 sent the Conservatives spiralling towards electoral defeat.
Rachel Reeves appears to have come perilously close to the turmoil of previous budgets, and that’s before she has even delivered it.
Veterans of the Blair government who have watched the chancellor at work behind the scenes say she has a calm, methodical approach, which compares favourably with the chaos that surrounded Brown in the buildup to his budgets, as KitKat wrappers and pages of speech drafts were strewn around the floor of No 11.
Yet to the world outside, the run-up to this difficult second Labour budget has looked utterly chaotic. A plethora of policies has been floated, denied, debated and ditched over the long buildup to next Wednesday.
And a carefully choreographed series of interviews and speeches from Reeves, setting out the bleak economic backdrop and paving the way for a manifesto-busting rate rise in income tax – to the dismay of many Labour MPs – gave way last week to yet another policy U-turn.
The highly controversial plan – which would have marked the first rise in the basic rate since 1975 – has now been ditched, in favour of a menu of smaller revenue-raisers, including extending the freeze on income tax thresholds, which the chancellor said in last year’s budget speech would “hurt working people”.
As investors dumped government bonds last Friday on the back of news that the income tax rise was off, fearing it meant Reeves was less committed to balancing the books, her allies insisted the change of heart was a result of wage growth leading to better than expected forecasts from the Office for Budget Responsibility (OBR).
But some with knowledge of the process cast doubt on that explanation. “I think they just changed their minds,” said one, pointing out that the essentials of the OBR’s judgment about the economy were already known weeks earlier.
On the night the U-turn leaked, one senior cabinet minister told the Guardian it was because the politics did not stack up. Despite angry denials from Treasury officials, backbenchers said they believed Reeves had “bottled it”. It was another blow to the government’s already damaged reputation.
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It wasn’t meant to unfold this way. Reeves and her team had hoped that by taking decisive action to shore up the public finances and increase the financial cushion against her fiscal rules on 26 November, she could win over sceptical bond markets, driving down the cost of borrowing.
At the same time, a slate of cost of living measures, likely to include cutting VAT on domestic fuel bills, would help to tackle inflation and open the way to more interest rate cuts from the Bank of England. Eventually, this would help to bring back the feelgood factor and point to a more positive 2026 for the economy.
This is still a possible economic outcome, on which Reeves and her team are pinning their hopes. Jonathan Portes, a former government economist, said: “If consumers and markets think, ‘She’s made the best of a bad job, and I personally will not be hit as badly as some of the more excitable headlines suggested,’ you could have a bounce.”
However, weeks of corrosive uncertainty may have made it harder to convince the markets – and sceptical voters – that Reeves has the situation under control.
And if she only increases her “headroom” against the rules to £15bn, from around £10bn in the spring statement, that may fall short of market expectations, risking a market wobble on the day.
Unusually, even before the budget has been delivered, it has had a very bumpy ride. The chancellor first got wind of the OBR’s plan to downgrade its productivity forecasts in June, and decided to start rolling the pitch for what was to come.
“The alternative strategy would’ve been not to say anything, hold your nerve. But when the forecasts are announced at the budget, they’d be dramatically down and market chaos would be unleashed. It could completely destroy the economy,” said a Treasury insider.
By the time of the Labour conference in September, Reeves was aware the downgrade would leave her with a £21bn gap in her plans. Again, her team faced the choice of whether to prepare the ground for a manifesto breach.
“Unless you bring people on a journey it makes things much harder to land,” one aide said. “If you drop any of that stuff from the clear blue sky you’d rightly be criticised.”
In media interviews, Reeves confirmed she no longer stood by a pledge made last year not to raise taxes, saying “the world has changed” due to conflicts, US tariffs and borrowing costs.
Labour MPs began to get jittery, with speculation mounting that Starmer, already at risk of a leadership challenge after difficult local elections next May, could face one even sooner.
Liam Byrne, the Labour chair of the business and trade select committee and a former Treasury minister, says the pre-budget uncertainty was not just politically damaging, but also had an economic cost.
“We’ve just come off the road doing a week’s worth of road trips up and down the country with hundreds of businesses and there’s a really dark sense of pessimism there,” he said. “What is paralysing them – and it is paralysis – is tax uncertainty.”
Over the following weeks, ministers and officials juggled various options for filling the fiscal gap, as well as paying for U-turns including on welfare, and increasing Reeves’s headroom. They worked up some plans for various tax rises, including raising the basic rate of income tax.
At the same time, the political pressure on the chancellor was mounting. Lucy Powell, Labour’s deputy leader, spoke up for anxious MPs and party members when she said in an interview days before the U-turn there was “no question” the party should stick to its manifesto.
But Jeremy Hunt, the Tory former chancellor who still exchanges texts with Reeves on a semi-regular basis, believes she could have pressed ahead with the plan if she had solid reasons.
“Manifesto promises are obviously a very big deal but the next election is not until 2029. If it turns out to be the right thing then lots of people would be prepared to forgive them,” Hunt said. “The worry is that any breach will increase taxes and slow down growth.”
Simon Case, the head of the civil service until a year ago, admits that officials had been concerned about whether Labour would be able to stick to its pledge even before it took power – but were not formally permitted to give advice during access talks.
“In Whitehall we were very worried about the promises they made before the election on not raising taxes because we obviously knew the true state of the public finances that would face them on arrival,” he told the Guardian.
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Some in government – including senior figures inside the Treasury – believe that this budget has shown more clearly than ever that the system itself is flawed. Case is among those who believes it needs to change. “We talk about a few billion here or there, that’s going to be enormously politically significant, because it’s the difference between breaking the manifesto rather than accepting the fact the process is unsustainable,” he said.
“Nobody is having the really big conversation: if we’re going to dramatically change the UK economy we need to be talking about how we spend hundreds of billions.”
The former cabinet secretary believes that Reeves’s woes are deeper-rooted. “Some of this is to do with the current political situation, of course. But there are other long-running issues that just feel as if they’re getting harder and harder.
“Our economic productivity is poor despite multiple governments’ efforts to fix it. There’s also great pressure to spend on public services because they’re not performing as we’d like. Every budget now for the next few years is going to be incredibly difficult.”
There have also been questions around the OBR. When Labour first came to power, the chancellor lavished praise on the watchdog, even legislating to ensure it would no longer be possible to present a major fiscal event without a forecast – as Liz Truss did with disastrous consequences.
But since putting the watchdog and its chair, Richard Hughes, on a pedestal, Reeves and her team have found their dealings with it increasingly frustrating – a sentiment which has sometimes spilled out in public.
She has openly questioned the timing of the productivity downgrade – which Labour believes should have happened earlier – and called for it to give Labour more credit for its pro-growth policies.
She is expected to announce that next spring’s OBR forecast will only cover economic growth, not judge the fiscal rules, in a bid to avoid the twice-yearly circus of speculation about tax and spend. A more radical suggestion was to drop the spring forecast altogether, but Hughes made clear he was against that option.
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Treasury insiders say that Reeves’s strategy for the budget has not changed since July when she picked her three priorities: cutting NHS waiting lists, paying off the national debt and tackling the cost of living. They acknowledge she knew back then that there would be no return to austerity or more borrowing – meaning tax rises were the only route.
“We’re being honest with the public that this is a tax-raising budget, but they obviously want to know if taxes are going up, what’s it going to do for me, what do they get in return,” said a Treasury source. “But once MPs see it in its totality they’ll see they have something to sell to the public.”
Many MPs are still to be convinced. It is perhaps unsurprising that many feel that Starmer’s leadership, already weakened after the extraordinary Downing Street briefing campaign to shore him up before the budget spectacularly backfired, is hanging in the balance.
John McDonnell, the former shadow chancellor, said: “Labour MPs are just desperate to avoid another disaster. We’ve had so many political mistakes. Everybody is hoping we don’t go through it again at the budget, that we get through it as quickly as possible and survive.
“There’s such a sense of frustration. We’ve been waiting for a Labour government for years. If voters don’t see it helping them they won’t just withdraw their support from Labour, they’ll be angry, and that’s where Reform comes in.”
Hunt said: “It’s fair to say the personal future of both PM and chancellor depends on the success, or otherwise, of the budget. Rachel Reeves has had a combination of bad luck and bad judgment.”
Others fear that this budget is more significant than any fallout for individual politicians, however senior. “Yes, this budget is going to be critical to the fortunes of Keir Starmer and Rachel Reeves, which are intertwined,” said Case.
“But this budget is even higher stakes than that, because it raises the question of whether centre ground governments can answer the fundamental questions that are hampering the UK. And if they can’t, voters will look elsewhere. It’s a really pivotal moment”.
