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A
make-or-break budget: inside the Treasury before Labour’s crucial day
Pippa
Crerar and Heather Stewart
From the
outside, the run-up to Rachel Reeves’s announcement has looked chaotic, and
many see the future of the chancellor and PM in the balance
Sat 22
Nov 2025 06.00 GMT
Every
budget could be described, to a greater or lesser extent, as a high-stakes
moment. Things can easily go badly wrong, as Gordon Brown discovered when he
abolished the 10p tax rate in 2007, or George Osborne when his 2012
‘omnishambles’ budget fell apart over pasties, and especially Kwasi Kwarteng,
whose disastrous mini-budget of 2022 sent the Conservatives spiralling towards
electoral defeat.
Rachel
Reeves appears to have come perilously close to the turmoil of previous
budgets, and that’s before she has even delivered it.
Veterans
of the Blair government who have watched the chancellor at work behind the
scenes say she has a calm, methodical approach, which compares favourably with
the chaos that surrounded Brown in the buildup to his budgets, as KitKat
wrappers and pages of speech drafts were strewn around the floor of No 11.
Yet to
the world outside, the run-up to this difficult second Labour budget has looked
utterly chaotic. A plethora of policies has been floated, denied, debated and
ditched over the long buildup to next Wednesday.
And a
carefully choreographed series of interviews and speeches from Reeves, setting
out the bleak economic backdrop and paving the way for a manifesto-busting rate
rise in income tax – to the dismay of many Labour MPs – gave way last week to
yet another policy U-turn.
The
highly controversial plan – which would have marked the first rise in the basic
rate since 1975 – has now been ditched, in favour of a menu of smaller
revenue-raisers, including extending the freeze on income tax thresholds, which
the chancellor said in last year’s budget speech would “hurt working people”.
As
investors dumped government bonds last Friday on the back of news that the
income tax rise was off, fearing it meant Reeves was less committed to
balancing the books, her allies insisted the change of heart was a result of
wage growth leading to better than expected forecasts from the Office for
Budget Responsibility (OBR).
But some
with knowledge of the process cast doubt on that explanation. “I think they
just changed their minds,” said one, pointing out that the essentials of the
OBR’s judgment about the economy were already known weeks earlier.
On the
night the U-turn leaked, one senior cabinet minister told the Guardian it was
because the politics did not stack up. Despite angry denials from Treasury
officials, backbenchers said they believed Reeves had “bottled it”. It was
another blow to the government’s already damaged reputation.
It wasn’t
meant to unfold this way. Reeves and her team had hoped that by taking decisive
action to shore up the public finances and increase the financial cushion
against her fiscal rules on 26 November, she could win over sceptical bond
markets, driving down the cost of borrowing.
At the
same time, a slate of cost of living measures, likely to include cutting VAT on
domestic fuel bills, would help to tackle inflation and open the way to more
interest rate cuts from the Bank of England. Eventually, this would help to
bring back the feelgood factor and point to a more positive 2026 for the
economy.
This is
still a possible economic outcome, on which Reeves and her team are pinning
their hopes. Jonathan Portes, a former government economist, said: “If
consumers and markets think, ‘She’s made the best of a bad job, and I
personally will not be hit as badly as some of the more excitable headlines
suggested,’ you could have a bounce.”
However,
weeks of corrosive uncertainty may have made it harder to convince the markets
– and sceptical voters – that Reeves has the situation under control.
And if
she only increases her “headroom” against the rules to £15bn, from around £10bn
in the spring statement, that may fall short of market expectations, risking a
market wobble on the day.
Unusually,
even before the budget has been delivered, it has had a very bumpy ride. The
chancellor first got wind of the OBR’s plan to downgrade its productivity
forecasts in June, and decided to start rolling the pitch for what was to come.
“The
alternative strategy would’ve been not to say anything, hold your nerve. But
when the forecasts are announced at the budget, they’d be dramatically down and
market chaos would be unleashed. It could completely destroy the economy,” said
a Treasury insider.
By the
time of the Labour conference in September, Reeves was aware the downgrade
would leave her with a £21bn gap in her plans. Again, her team faced the choice
of whether to prepare the ground for a manifesto breach.
“Unless
you bring people on a journey it makes things much harder to land,” one aide
said. “If you drop any of that stuff from the clear blue sky you’d rightly be
criticised.”
In media
interviews, Reeves confirmed she no longer stood by a pledge made last year not
to raise taxes, saying “the world has changed” due to conflicts, US tariffs and
borrowing costs.
Labour
MPs began to get jittery, with speculation mounting that Starmer, already at
risk of a leadership challenge after difficult local elections next May, could
face one even sooner.
Liam
Byrne, the Labour chair of the business and trade select committee and a former
Treasury minister, says the pre-budget uncertainty was not just politically
damaging, but also had an economic cost.
“We’ve
just come off the road doing a week’s worth of road trips up and down the
country with hundreds of businesses and there’s a really dark sense of
pessimism there,” he said. “What is paralysing them – and it is paralysis – is
tax uncertainty.”
Over the
following weeks, ministers and officials juggled various options for filling
the fiscal gap, as well as paying for U-turns including on welfare, and
increasing Reeves’s headroom. They worked up some plans for various tax rises,
including raising the basic rate of income tax.
At the
same time, the political pressure on the chancellor was mounting. Lucy Powell,
Labour’s deputy leader, spoke up for anxious MPs and party members when she
said in an interview days before the U-turn there was “no question” the party
should stick to its manifesto.
But
Jeremy Hunt, the Tory former chancellor who still exchanges texts with Reeves
on a semi-regular basis, believes she could have pressed ahead with the plan if
she had solid reasons.
“Manifesto
promises are obviously a very big deal but the next election is not until 2029.
If it turns out to be the right thing then lots of people would be prepared to
forgive them,” Hunt said. “The worry is that any breach will increase taxes and
slow down growth.”
Simon
Case, the head of the civil service until a year ago, admits that officials had
been concerned about whether Labour would be able to stick to its pledge even
before it took power – but were not formally permitted to give advice during
access talks.
“In
Whitehall we were very worried about the promises they made before the election
on not raising taxes because we obviously knew the true state of the public
finances that would face them on arrival,” he told the Guardian.
Some in
government – including senior figures inside the Treasury – believe that this
budget has shown more clearly than ever that the system itself is flawed. Case
is among those who believes it needs to change. “We talk about a few billion
here or there, that’s going to be enormously politically significant, because
it’s the difference between breaking the manifesto rather than accepting the
fact the process is unsustainable,” he said.
“Nobody
is having the really big conversation: if we’re going to dramatically change
the UK economy we need to be talking about how we spend hundreds of billions.”
The
former cabinet secretary believes that Reeves’s woes are deeper-rooted. “Some
of this is to do with the current political situation, of course. But there are
other long-running issues that just feel as if they’re getting harder and
harder.
“Our
economic productivity is poor despite multiple governments’ efforts to fix it.
There’s also great pressure to spend on public services because they’re not
performing as we’d like. Every budget now for the next few years is going to be
incredibly difficult.”
There
have also been questions around the OBR. When Labour first came to power, the
chancellor lavished praise on the watchdog, even legislating to ensure it would
no longer be possible to present a major fiscal event without a forecast – as
Liz Truss did with disastrous consequences.
But since
putting the watchdog and its chair, Richard Hughes, on a pedestal, Reeves and
her team have found their dealings with it increasingly frustrating – a
sentiment which has sometimes spilled out in public.
She has
openly questioned the timing of the productivity downgrade – which Labour
believes should have happened earlier – and called for it to give Labour more
credit for its pro-growth policies.
She is
expected to announce that next spring’s OBR forecast will only cover economic
growth, not judge the fiscal rules, in a bid to avoid the twice-yearly circus
of speculation about tax and spend. A more radical suggestion was to drop the
spring forecast altogether, but Hughes made clear he was against that option.
Treasury
insiders say that Reeves’s strategy for the budget has not changed since July
when she picked her three priorities: cutting NHS waiting lists, paying off the
national debt and tackling the cost of living. They acknowledge she knew back
then that there would be no return to austerity or more borrowing – meaning tax
rises were the only route.
“We’re
being honest with the public that this is a tax-raising budget, but they
obviously want to know if taxes are going up, what’s it going to do for me,
what do they get in return,” said a Treasury source. “But once MPs see it in
its totality they’ll see they have something to sell to the public.”
Many MPs
are still to be convinced. It is perhaps unsurprising that many feel that
Starmer’s leadership, already weakened after the extraordinary Downing Street
briefing campaign to shore him up before the budget spectacularly backfired, is
hanging in the balance.
John
McDonnell, the former shadow chancellor, said: “Labour MPs are just desperate
to avoid another disaster. We’ve had so many political mistakes. Everybody is
hoping we don’t go through it again at the budget, that we get through it as
quickly as possible and survive.
“There’s
such a sense of frustration. We’ve been waiting for a Labour government for
years. If voters don’t see it helping them they won’t just withdraw their
support from Labour, they’ll be angry, and that’s where Reform comes in.”
Hunt
said: “It’s fair to say the personal future of both PM and chancellor depends
on the success, or otherwise, of the budget. Rachel Reeves has had a
combination of bad luck and bad judgment.”
Others
fear that this budget is more significant than any fallout for individual
politicians, however senior. “Yes, this budget is going to be critical to the
fortunes of Keir Starmer and Rachel Reeves, which are intertwined,” said Case.
“But this
budget is even higher stakes than that, because it raises the question of
whether centre ground governments can answer the fundamental questions that are
hampering the UK. And if they can’t, voters will look elsewhere. It’s a really
pivotal moment”.
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