When Rachel Reeves’ Budget preparations descended into chaos earlier this month, after the Financial Times revealed that the chancellor had ripped up her plan to increase income tax, one cabinet minister conveyed the mood among Labour MPs with a single “horror” face emoji.
Reeves was furious, according to people close to her. Markets tumbled amid fears that Labour MPs, anxious about the political damage that would be incurred from such a blatant manifesto breach, were now writing the Budget, not the chancellor.
Reeves had spent weeks preparing Labour MPs, the markets and the country for a Budget on November 26 that would be so tough an election pledge not to raise income tax rates would have to be broken. The U-turn suggested that the chancellor had lost control.
Since then, Reeves and senior colleagues have been dispatched to reassure British business, international investors and Labour MPs that the Budget, rather than being a shambles, will lay the foundations for future prosperity.
Varun Chandra, Sir Keir Starmer’s business envoy, has been in New York this week meeting big banks to try to persuade them that Reeves’ Budget will stabilise the public finances, bear down on inflation and create the conditions for lower interest rates.
Chandra has also been meeting FTSE 100 bosses to convey the same message. “Varun has been telling people this is not an anti-business Budget,” said one person involved in the charm offensive. “There are lots of things that could have been in there that are not.”
Senior ministers, including business secretary Peter Kyle and chief whip Jonathan Reynolds, have urged Reeves to drop suggested tax rises that would have hit UK business, only a year after the chancellor hit them with a £25bn national insurance bill.
Although business will still be hit on November 26 — including through a crackdown on pension payments made through salary sacrifice schemes — ministers say things could have been worse, as the chancellor delivers a package of tax rises and spending cuts worth up to £30bn.
“There were things in there that we took out,” said one person close to the Budget preparations. Plans to increase taxes on partnerships, affecting lawyers and accountants, were dropped, along with a mooted “exit tax” on people selling assets and moving abroad. Banks are expected to be spared from a mooted increase in taxes on their profits.
Instead Reeves is expected to present a Budget that will have “wealth” in its sights rather than business per se, including through a so-called “mansion tax” on expensive homes.
Labour MPs have also been assured that in spite of dropping the income tax plan, which was expected to raise at least £6bn a year, Reeves will still have money to scrap the two-child benefit cap, which is blamed by MPs for fuelling child poverty.
“Most people have had a chance to discuss the Budget,” said one Labour MP, adding that Reeves and her inner team had been available to discuss the plan. Another said: “Treasury ministers have been doing loads of engagement for weeks.”
While most Labour MPs want to scrap the two-child cap, they know the move could go down badly with a public that broadly supports the limit on benefits and will be pilloried by the Conservatives. Some large families could be £20,000 a year better off after the change.
Reeves will also try to sugar the pill with measures to address the cost of living, including cutting domestic energy bills and an expected extended freeze on petrol duty.
But a plan to freeze income tax thresholds for a further two years until 2030 will hit “working families”, as Reeves admitted in her Budget last year when she ruled out such a move.
Starmer confirmed at the G20 summit in Johannesburg that the Budget would be about “protecting our public services, the NHS, cutting our debt, which is vitally important, and dealing with the cost of living crisis.” But this framing has led to claims that Starmer’s economic message is confused.
George Osborne, former Conservative chancellor, told the Commons treasury committee recently that he thought the government’s “number one priority” was growth. Number 10 insisted on Friday that was still the case.
Reeves’ allies argue that the chancellor dropped the plan to raise income tax partly to reflect improved forecasts and partly because, as formulated, it would not have raised the “huge sums” needed to justify a flagrant breach of an election promise.
The gap is now being filled by a “smorgasbord” of smaller tax rises, including an increased raid on salary sacrifice schemes used by big companies as a tax-efficient way to fill employees’ pension pots.
The risk of unleashing an “omnishambles” Budget, like Osborne’s in 2012, when a chancellor is later forced into multiple retreats, is an ever-present danger — especially when party discipline is fragile.
Some Labour MPs claim that Reeves has suggested that the now-ditched income tax rise could have been a “rabbit out of the hat” on Budget day, where she would reveal she could fulfil her plans without breaking the Labour manifesto.
“That’s not true,” insists one ally of Reeves. “It wouldn’t have impressed anyone on the day, least of all the markets.” The original plan, until the FT learned of the U-turn, was to let the news dribble out during the course of the last seven days.
Reeves desperately wants to restore a sense of order before Budget day. Her supporters insist that after days of fine-tuning the package, it will lay the economic foundations for growth over the rest of the parliament.
“You will see a clear theme around fairness, those with the broadest shoulders paying more, reform and ensuring we are getting waste out of the system,” said one Reeves ally. “We will be cracking down on fraud.”
The person insists that this year’s tax rises will be a turning point. “For the rest of the budgets in this parliament, people will start to see the benefits of what has been done. You can see a path to the Budget after this one being quite different.”
It is an optimistic take on a package forged in conditions of chaos. It is also what Reeves said after her first “one and done” Budget last year.