Rachel Reeves will promise to tackle Britain’s cost of living crisis and deliver fiscal stability in Wednesday’s budget, which is billed as a decisive moment for the fate of Keir Starmer’s beleaguered government.
The chancellor will say she will do what is needed to shore up the economy as she raises billions of pounds worth of taxes to help offset lower than expected growth forecasts.
But with disquiet among Labour MPs over the government’s handling of the run-up to the budget – including trade-offs as a result of the decision not to go ahead with a rise in income tax rates – she is battling to keep her party on side.
The government has been buffeted by a series of damaging leaks and speculation, much of it prompted by ministers, as they attempted to lay the groundwork to avoid spooking the markets and plummeting even further in the polls.
Reeves is expected to announce a rise in the minimum wage, bring in the first rail fares freeze for 30 years, cut green levies on energy bills and scrap the controversial two-child benefit cap to help improve living standards.
But after dropping plans for an income tax rise amid higher wage growth and speculation over Starmer’s future, she has been forced to bring in an array of smaller, riskier tax rises to fill the gap of at least £20bn, and to abandon costly options such as reversing the 5p cut in fuel duty.
In about a dozen measures, the chancellor is set to continue a freeze of income tax thresholds first introduced by Rishi Sunak for two more years, limit salary sacrifice schemes, bring in a gambling levy, pay-per-mile for electric vehicles and a property tax on high-value homes.
Despite pre-budget leaks, it is still unclear where billions of pounds worth of tax rises could fall, raising the prospect of announcements unravelling in the days after the budget, which could further dent Labour’s standing with the markets and the public.
As part of the government’s ambition to improve living standards, millions of low-paid workers are to get a pay rise of 4.1% from April next year as minimum wage rates go up.
The “national living wage” will rise to £12.71 from April for over-21s, which the government said would increase the annual earnings of about 2.4 million workers by £900.
The minimum wage for 18- to 20-year-olds will increase by 8.5% to £10.85 an hour, narrowing the gap with older workers as part of the government’s commitment to “raise the floor” on wages for all employees.
Although she has insisted there will be no return to austerity, the chancellor is also set to pencil in steep departmental cuts for the end of the parliament, the Guardian understands, meaning areas like local government, the courts and border control could be hit.
Under current plans, departmental spending is due to rise by an average of 1% in 2029-30. But she is expected to reduce that forecast to just 0.5% – a level that would require heavy cuts to some non-protected areas.
The move would trim £2.8bn from spending plans, which government officials say can be delivered because of action such as abolishing police and crime commissioners, ending asylum hotel accommodation, cracking down on benefit fraud and laying off thousands of civil servants.
Economists warn, however, that the savings would be undeliverable and are likely to be revised in future years.
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Ben Zaranko, the associate director at the Institute for Fiscal Studies, said: “If the chancellor promises unspecified spending cuts for the back end of the parliament, in what could well be an election year, it would be sure to raise questions among investors about credibility and deliverability of the budget.”
Stuart Hoddinott, an associate director at the Institute for Government, said: “If the government decides to cut spending in the final year of the forecast, it will have to make difficult decisions about how to allocate those cuts.
“But more likely, this is a return to the approach of the last government: pencilling in fantasy spending numbers in the last year of the forecast to hit their fiscal rules before topping them up closer to the time.”
In other developments, Reeves is expected to press ahead with scrapping hundreds of millions of pounds in tax breaks for the Motability scheme that helps provides cars for disabled people, sparking concerns among some Labour MPs.
The Treasury was reported to have been considering axing tax breaks up to £1bn but is likely to announce a scaled back version of the policy, amid concerns among ministers that the broader plan could have led to Motability’s collapse.
Ministers are also expected to confirm plans to encourage more drilling in the North Sea, including giving oil and gas companies incentives to drill in parts of the seabed which others have previously abandoned.
The plans are likely to be controversial with green campaigners and Labour MPs given the party went into the next election promising not to grant new licences for North Sea oil and gas.
