Rachel Reeves has been accused of lying about the dire state of Britain’s finances in a bid to sell £26billion of tax hikes in her Budget to the public and cabinet ministers to fund a boost in benefits.
Sir Keir Starmer on Monday repeatedly defended his Chancellor saying “there was no misleading”.
But Tory leader Kemi Badenoch said Ms Reeves should quit after calling an "emergency press conference" to tell the public how terrible the public finances were when forecasts were more positive.
Ms Reeves is now facing increasing calls to resign over deceptive briefings ahead of her Budget last week that suggested she had a multi-billion-pound blackhole to fill.
What were the warnings?
In the lead-up to her Budget, the Chancellor’s warnings referenced a downgrade to productivity by the independent economic forecaster the Office for Budget Responsibility (OBR), which Ms Reeves argued significantly weakened tax receipts and threatened public finances.
But the OBR has said that while there was productivity downgrade, which would have cut receipts by £16 billion, that loss was largely offset by higher-than-expected wage growth and inflation.
This meant the public finances reportedly ended up with a £4.2 billion surplus, not a deficit. But this analysis was apparently not passed on to the public or cabinet colleagues.
What was misleading?
In pre-Budget briefings the Treasury adopted an urgent tone about the state of the economy and at the end of October suggested the Chancellor would be putting 2p on Income Tax to plug the hole, a breach of Labour’s manifesto not to raise levies on working people.
This was reinforced on Tuesday November 4, when Ms Reeves called an extraordinary pre-Budget press conference where she warned that she would have to make “difficult” decisions in her fiscal statement and everyone would have to “play their part” to steady the economy.
Two weeks later, it was leaked that the Government had U-turned on the plan to hike Income Tax.
Instead, in her Budget the Chancellor announced tax increases adding up to £26 billion, including an additional three-year freeze on income tax and national insurance thresholds meaning more than 1.7 million workers will be dragged into either paying the levy for the first time or pushed into a higher band by 2030-31.
The increases will help fund the scrapping the two-child benefit cap and cut energy bills.
The fallout
BBC political editor Chris Mason accused the Chancellor of withholding vital information from voters when she laid the ground for tax rises and argued she cherry-picked information provided in a pre-Budget press conference.
Members of Sir Keir Starmer's top team have said Ms Reeves misled the Cabinet.
The Times quoted an unnamed minister as describing the handling of the Budget as "a disaster from start to finish".
"At no point were the Cabinet told about the reality of the OBR forecasts," they told the newspaper.
What has the Chancellor said?
The Chancellor on Monday responded to the claims that she misled Cabinet ministers about the Budget.
Speaking to BBC Wales at the Wales Investment Summit, she said: "You would never expect the Prime Minister and Chancellor to go through all the detailed numbers.
"The cabinet are briefed on the morning of the Budget on the Budget numbers.
"Of course, we go through things that affect individual government departments, but the whole information of the Budget is not supposed to be provided until the Chancellor delivers the Budget.
"Obviously, this time, it was leaked early, but not by the Treasury."
During a press conference in London on Monday, Sir Keir said: "There was no misleading, and I simply don't accept, and I was receiving the numbers, that being told that the OBR productivity review means you've got £16 billion less than you would otherwise have had shows that you've got an easy starting point.
"Yes, of course, all the other figures have to be taken into account. But we started the process with significantly less than we would otherwise have had.
He said there was "no pretending" that it was a "good starting point".
Sir Keir added: "There was a point at which we did think we would have to breach the manifesto in order to achieve what we wanted to achieve. Later on, it became possible to do it without the manifesto breach.
"Given the choice between the two, I didn't want to breach the manifesto, and that's why we came to the decisions that we did."
The Prime Minister added that he is "proud" of lifting the two-child benefit cap.
Sir Keir said in a speech: "I'm proud we scrapped the two-child limit. "I am proud of lifting over half a million children out of poverty, proud we raised the national minimum wage again.
"That is what a Labour Government is for, making life better for working families, unlocking their potential and giving our children a fair chance to get on and that is the story of the Budget."
What happens next?
Sir Keir said reforming the welfare state is crucial to Britain's "economic renewal".
The PM’s previous attempt to cut disability benefits were earlier this year were torpedoed by a rebellion of backbench Labour MPs.
On Monday, he confirmed former Labour cabinet minister Alan Milburn would produce a report on the issue of young people's inactivity and work.
Sir Keir said the "barriers" holding back young people need to be removed and warned they can "trap" people.
"This is not about propping up a broken status quo, nor is it because we want to look somehow politically tough,” he said.
“The Tories played that game and the welfare bill went up by £88billion, and they left children too poor to eat, and young people off as too ill to work. That was a total failure."
But Sir Keir sidestepped a question on whether he would remove the whip from MPs if they do not back a second attempt at welfare reforms.
"On this issue in welfare, I'm focusing particularly on young people, I do think there's a general consensus there is a moral mission,” he said.
"There aren't many people who are comfortable with nor should they be the fact there's nearly a million young people who are ... stuck with not earning and not learning."
Shadow chancellor Mel Stride has called for the UK's financial regulator to investigate "possible market abuse" by Treasury and Downing Street workers in the run-up to the Budget.
The Conservatives have sent a letter to the Financial Conduct Authority (FCA) requesting a probe into potential market manipulation.
"Confidential market sensitive information appears to have been spun, leaked and misused - and markets, businesses and families have paid the price," Mr Stride claimed.
