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Chancellor Rachel Reeves has warned Labour critics to stop peddling the “dangerous” idea that the government can relax fiscal discipline, as she paved the way for a major tax-raising Budget to balance the books.
In a message to a restive Labour conference in Liverpool, she urged MPs and activists to “have faith”, arguing that the only route to deliver the party’s priorities and a strong economy was to maintain the confidence of the markets.
While ministers often use their conference speech to address an audience outside the hall, Reeves’ message was aimed squarely at internal critics who believe she should relax her fiscal rules to boost spending.
Her speech contained a thinly veiled attack on Greater Manchester mayor Andy Burnham, who wants Britain to stop being “in hock” to the bond markets and has been touring the conference fringe urging a different economic course.
Reeves warned that when markets lose confidence, ordinary voters suffer the consequences via higher prices and interest rates.
“There are still people who peddle the idea that we could just abandon economic responsibility and cast off any constraints on spending. They are wrong — dangerously so,” Reeves said.
She said that Britain’s economy was strong, but warned that tough choices lay ahead in her November 26 Budget. Those choices had been made “even harder by global headwinds” as well as “long-term damage” already done to the country, Reeves said.
Earlier she signalled there will be big tax rises in her coming Budget, telling the BBC that “the world has changed” and confirming that new official productivity forecasts will blow a hole in her fiscal plans.
Reeves blamed the wars in Ukraine and Gaza, rising global borrowing costs, Donald Trump’s tariffs and new Office for Budget Responsibility forecasts for forcing her to change tack.
Last November the chancellor said that she would “not be coming back with more tax increases” after raising taxes by £40bn in her first Budget, but on Monday she said: “Everyone can see in the last year the world has changed and we’re not immune to that change.”
She added: “We also know the OBR are reviewing the productivity numbers based on the past productivity experience under the last government and are set to make changes there — we have to respond to those.”
The OBR productivity downgrade is expected to be the biggest single factor in blowing Reeves’ fiscal plans off course. She is expected to be confronted with an overall gap of up to £30bn against her fiscal rules, including £5bn caused by the government’s retreat on planned welfare reforms.
Reeves has promised to fund day-to-day spending, excluding investment, entirely with tax receipts by 2029-30. She left herself with a slim £9.9bn of margin against this rule in her March spring statement.
Reeves and Prime Minister Sir Keir Starmer have insisted their election promises on tax “stand”. Conservatives and some Labour MPs believe the choice of the word “stand” is intended to allow the chancellor wriggle room to break a pledge not to increase income tax, national insurance or value added tax.
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