Rachel Reeves has been warned that her plans for tax rises and spending restraint in the run-up to the next general election resemble a work of “fiscal fiction” as MPs expressed concern about the impact of her budget on their constituents.
A day after the chancellor’s statement, the Institute for Fiscal Studies (IFS) said Reeves had chosen a high-risk strategy by backloading the squeeze to just before voters go to the polls in 2029.
Helen Miller, the thinktank’s director, said the budget plans would involve “near-heroic restraint in an election year” and suggested that Labour may ultimately be forced to change course.
“[It is] a backloaded set of tax rises that almost entirely delay the pain. It’s reminiscent of the fiscal fictions of recent years. I hope this is a government able to deliver on its plans. But I have my doubts,” she said.
The thinktank also raised questions about the government’s future plans for supporting children with special needs, after the Office for Budget Responsibility (OBR) identified what it said could be a £6bn future funding shortfall.
Labour MPs in Westminster absorbed the potential impact of hefty future tax increases, albeit to fund measures many welcome, including the scrapping of the two-child benefit cap.
One backbencher said: “Our number one priority is supposed to be about getting the cost of living down. But this budget makes most of my voters poorer in an election year. Young people, who are going Green, are particularly screwed. I don’t understand how this is supposed to work.”
Another warned: “It’s been smartly designed to narrowly hit the landing zone between PLP [the parliamentary Labour party] and market kicking off. But nonetheless leaves you in the same cycle of shit.”
Treasury sources pointed to Reeves’s determination to “defy” OBR forecasts and deliver stronger economic growth, potentially avoiding the need for a pre-election squeeze. She also hopes to bring down government borrowing costs by reassuring bond markets.
Keir Starmer said on Thursday that Reeves’s £26bn tax-raising budget had “kept to our manifesto”, but conceded that Labour had “asked everybody to contribute” in the years ahead.
“That is because we need to protect our NHS to make sure that it’s there for people when they need it. Secondly, to make sure that we’ve got the money to put into our schools and … the third thing is to bear down on the cost of living,” he told Sky News.
In its analysis of the budget, the Resolution Foundation said Reeves’s biggest revenue raiser, the three-year freeze on income tax and national insurance thresholds, would hit poorer households harder than raising income tax rates – a policy that would have breached the letter of Labour’s election promises.
“Ironically, sticking to her manifesto tax pledge has cost millions of low-to-middle earners, who would have been better off with their tax rates rising than their thresholds being frozen,” said the thinktank’s director, Ruth Curtice.
A 1p tax rise would have raised the same amount of money but been less costly than freezing thresholds for anyone with an income below £35,000, she said, adding: “Indeed, all but the top 10% of the income distribution are worse off because of opting for threshold freezes over rate rises.”
Some MPs have expressed concern about the threshold freeze, which is expected to bring 920,000 additional people paying the higher rate of income tax, as their salaries rise.
One minister told the Guardian: “Millions and millions of people are fuming about the prospect of becoming higher rate taxpayers on jobs that pay just double the minimum wage. This is not the sign of a strong economy.”
MPs were also sharing analysis by the Joseph Rowntree Foundation (JRF), based on OBR forecasts, that showed despite the government’s cost of living measures, including cuts to household energy bills, consumers are on track for “the bleakest parliament on record for living standards”.
JRF said the average household would be £850 a year worse off by 2029-30 than when Labour had come to power, with those at the top end of the income scale hit hardest, as Reeves targets them with tax rises.
In Wednesday’s well-trailed budget, the chancellor said borrowing would be higher than planned for the next three years, before falling back sharply by 2029-30 when her fiscal rules are judged. She plans to achieve this through backdated tax rises, including the threshold freeze; and by squeezing Whitehall budgets.
Labour is now promising to increase day-to-day departmental spending by just 0.5% in real terms in 2028-29 and 2029-30 – half the rate previously planned.
Miller, of the IFS, expressed scepticism about whether that would be achievable. “Perhaps the government really will be able to find new efficiency savings. Or, maybe, when the time comes, and as the election looms, it will find that the spending plans are unrealistically low.”
Contrary to expectations, the downgrade to the OBR’s economic forecasts was modest, wiping just £6bn off Reeves’s headroom against her fiscal rules by the end of the forecast period.
Miller said that meant the “fiscal repair job” required in the budget was minor; but Reeves had chosen to increase spending, including to cover U-turns on disability cuts and the winter fuel allowance, as well as aiming to meet her rules with a much bigger buffer to spare.
The Conservatives have dismissed Reeves’s budget as aimed at “Benefits Street”. However, analysis by the Institute for Public Policy Research (IPPR) shows that 70% of the additional spending from abolishing the two-child limit will go to working families. The thinktank also said that the overall welfare budget as a share of GDP is due to remain flat, between last year’s general election and 2031.
Ashwin Kumar, the IPPR’s director of research and policy, said: “This was a budget for working parents who are doing their best in increasingly tough circumstances. Abolishing the two-child limit is targeted, sensible and fair. It supports families who need it most, reduces child poverty and saves the public money in the long run.”
