Reeves aims to prepare voters and markets for possible budget tax rises | Budget 2025

There were two audiences for Rachel Reeves’s hastily arranged early morning speech on Tuesday: the financial markets, and Labour’s disillusioned voters.

As she made clear, though only obliquely, Keir Starmer’s government was considering abandoning its pre-election pledge not to raise income tax, backed into a corner by dire forecasts from the Office for Budget Responsibility (OBR). No chancellor has raised the basic rate since Labour’s Denis Healey in 1975.

Reeves hoped to explain to the public why that might be necessary – by pointing to the punishing costs of allowing public debt to keep rising – and to convince investors she is determined to wrestle the public finances under control.

It is extremely rare for chancellors to haul in journalists for a formal speech less than three weeks before a budget.

But Reeves and her team are acutely conscious of how difficult a communications challenge they have ahead of them.

Reeves had hoped to stick to Labour’s manifesto pledges not to touch income tax, VAT or national insurance, reaching instead for progressive “reforms” of the tax system that would raise more from those with the “broadest shoulders”.

But some in Labour were always sceptical about the politics of that – fearing a botched “pasty tax”-style budget – and an OBR forecast at the worse end of the Treasury’s fears has put the manifesto promises back in play.

Amid a maelstrom of speculation about individual tax rises, then, the team at No 11 were keen to haul back control of the narrative.

Part of their agenda is backward-looking. With the OBR downgrade to productivity forecasts knocking Reeves’s tax and spending plans off track by perhaps £20bn, she used her speech to blame long-term policy failures – in particular “stop-go investment” – for the UK’s weak performance.

“Years of economic mismanagement have limited our country’s potential,” she said.

From George Osborne’s austerity project after 2010, through the “rushed and ill-conceived” Brexit deal and the lack of preparedness for Covid, this part of her speech contrasted with Labour’s approach on entering office.

In her doom and gloom speech last July, when she announced the ill-fated winter fuel allowance cut, and in last year’s tax-raising budget, Reeves tended to lay the blame for the budget “black hole” on short-term decisions taken by her predecessor, Jeremy Hunt – and suggest she had dealt with it.

That has made it all the more difficult to come back to taxpayers for more – though as the OBR’s productivity review will lay bare, the problems in the UK economy are deep-seated and complex.

As well as this history lesson, Reeves repeatedly pointed in Tuesday’s speech to shorter-term shifts, including Donald Trump’s US tariffs – saying she thought the public would understand the picture had changed. “I think it is important that people are honest. Everyone can see that this year has thrown many more challenges our way,” she said.

In the face of these obstacles, Reeves contrasted her own stance of maintaining public spending, particularly in the NHS, with what she argued were impossible promises of cuts from Reform and the Tories.

Her argument is that sticking to Labour’s investment plans is vital for public services – and good for productivity, too.

The chancellor’s allies say she emerged emboldened from the autumn conference season, feeling the dividing lines for the next general election are now clear – Labour investment v austerity from its rightwing rivals.

Though she didn’t quite say it explicitly, the combination of weaker economic forecasts from the OBR, and her refusal to make Osborne-style cuts, either in investment or day-to-day spending, points to tax rises in the budget on 26 November.

And she left the door wide open to making those rises in a way that hits more than just those with the “broadest shoulders” – who were noticeably absent from the speech.

“If we are to build the future of Britain together, we will all have to contribute to that effort,” she said. “Each of us must do our bit for the security of our country and the brightness of its future.”

As well as a hint to voters of what is to come – and why – that was meant as a signal to markets that she is prepared to take drastic action, even as far as breaking Labour’s promises, if that is what it takes to stick to her “iron clad” spending rules.

And while her prescription in the face of the UK’s fiscal predicament is different from Osborne’s in 2010, the chancellor echoed his approach by schooling voters on the hard realities of government bond markets.

“No accounting trick can change the basic fact that government debt is sold on financial markets,” she warned. “There are limits on the price that banks, hedge funds and pension funds are willing to pay for our debt, and we are competing constantly with other countries also selling debt. The more that we try to sell, the more it will cost us.”

By the same token, she stressed the potential benefits of getting the budget right – if it succeeds in winning over sceptical bond markets – which have tended to demand a premium from the UK government, since Liz Truss’s disastrous mini-budget three years ago.

Yields on gilts – UK government bonds – have been drifting down since Reeves initially began to make clear last month that taxes were on their way up. The 10-year yield was down again modestly after her speech on Tuesday, by 3.5 basis points – but investors appear to be in a holding pattern before the budget.

Reeves’s speech was aimed at setting the scene for voters and the markets – but with scant details yet on offer, its main impact may have been just to underline quite how much is at stake.