U-turns, Squabbles And Horse Trading Inside Downing St: How Not To Plan A Budget

When Rachel Reeves called a televised press conference at the beginning of November, she may as well have run up a flag above No 11 Downing Street with the words ‘income tax hike’ on it.

After months of batting away questions with the line that Labour would stick to its manifesto pledges – which were not to raise direct taxes on ‘working people’ – the language suddenly shifted to “we will all have to contribute”.

Then, two weeks later after this highly unusual intervention to prepare the nation for the worst, word was leaked that income taxes would not be coming after all – a huge U-turn which sent the UK’s borrowing costs surging. That Downing Street flag was quickly run down.

If anything summed up how not to prepare for a Budget, this was it.

When Reeves stands up to the despatch box on Wednesday to reveal her tax and spending decisions, it will be the culmination of arguably the most troubled Budget preparation process in recent years.

Budget stakes are high

There is no doubt the pressure is on. The Budget will define Labour, and if it lands badly will not only be bad news for millions of voters, but could end the careers of Reeves and Keir Starmer. The stakes are high.

But the process has been dogged by leaks – in itself not unusual in the modern era. What is unusual is the shifting messages, which suggests, rightly or wrongly, advisors at odds with each other, indecision and horse trading

So why did the planning for this year’s Budget descend into such chaos?

The preparation for the Budget can be traced back to an overhaul of the backroom staff in Nos 10 and 11 at the beginning of September when Darren Jones was moved from chief secretary to the Treasury to become Starmer’s chief secretary in No 10.

Starmer also appointed former deputy governor of the Bank of England Minouche Shafik as his chief economic adviser, and brought in Blair-era adviser Tim Allen to beef up his communications.

Meanwhile at No 11 pensioners minister Torsten Bell, the former head of the influential Resolution Foundation, was playing a key role advising Rachel Reeves. The Chancellor also brought in former Institute of Fiscal Studies senior researcher David Sturrock and the Resolution Foundation’s Emily Fry in October.

The challenge facing Reeves has been clear for months.

An expected deterioration in key economic indicators – most notably the Office for Budget Responsibility’s (OBR) productivity forecast – combined with U-turns over policies such as winter fuel payment cuts and welfare reform, had created a hole in the public finances estimated at up to £40bn which the Chancellor would have to fill with tax rises.

The big question was whether to rip off the band aid and to raise income tax of 1 or 2p. On the plus side this would raise the amount needed and prevent another year of economic chaos. On the other a clear breach of a manifesto pledge carried huge political risks.

In the words of the Chancellor during that press conference, to do “what is right, not what is popular”.

Others advocated a ‘smorgasbord’ approach of many smaller tax rises. This would avoid the political fallout, but is more complex and doesn’t raise as much.

Plugging the gap without spooking the markets

The mission was to deliver a set of measures which would plug the gap while keeping voters, the markets and Labour MPs broadly on-side. And it had to be prepared in a calm, professional manner which did not fuel growth-sapping uncertainty.

From the start there were signs which boded ill. It was as early as August when “kite flying” suggestions about various property taxes began to appear in the papers.

That the rumour-mill was able to crank into life so early was partly due to ineffective news management by the Government, who had left a vacuum over the quiet summer months. The lethargic approach was in sharp contrast to the hyperactivity shown by Reform UK, who held weekly press conferences all through the holidays.

At the time, an alarmed Labour MP told The i Paper: “The key thing in the next few months is that we don’t end up in a cycle of talking about tax rises [and] confidence in the economy weakens.”

In fact, that is exactly what happened.

There is always going to be intense speculation in the run-up to a Budget, but Reeves made life harder for herself with the crucial decision to delay the Budget beyond its usual timing of October or early November.

This year’s Budget on 26 November is almost a full month later than it was in 2024. The logic behind the decision was that it would give the OBR more time to account for the positive implications of the Government’s growth-boosting policies, hopefully increasing the amount of money the Chancellor had to play with.

Economically, this strategy just about paid off, with the OBR forecasting better than expected tax-receipts, allowing the Chancellor to ditch the income tax rise.

But business leaders have been annoyed by the delay, saying they are waiting to see the Government’s tax and spend policies before making their own decisions about the year ahead. “The lateness of the Budget is clearly not helping investment,” a Labour MP complained.

Now, the general consensus among economists is that overall, the timing was a mistake. A range of economic statistics suggest that speculation about the Budget has hit the economy.

‘A bad hand, played poorly’

According to Rightmove, nearly a fifth of potential home movers have put their plans on ice until they see what’s in the Budget. Meanwhile, official figures earlier this month showed that the UK economy had only grown by 0.1 per cent in the third quarter of this year, with Budget uncertainty widely blamed for the lacklustre performance.

Andy Haldane, a former chief economist at the Bank of England, said recently that Reeves had received a “bad hand”, which she had played “pretty poorly”.

“If you speak to businesses, speak to consumers, their fearfulness about where the axe will fall is causing them, not unreasonably, to save rather than spend, to not put their balance sheet to work and that has taken the legs from beneath growth in the economy.”

He added: “The process has become far too elongated and far too leaky.”

When it comes to leaks, the Treasury had the best of intentions.

At the start of the Budget process, Reeves’s inner circle resolved not to answer any questions from the media about what might be in it in a bid to avoid accidental leaks, The i Paper understands.

Instead they decided that they would prime markets and the public with a small number of deliberate interventions, including speeches and interviews by the Chancellor.

But the anti-leaks strategy failed, with business representatives and think-tanks who had been consulted by the Treasury seemingly spreading news of the Budget’s contents.

One Government insider admitted: “The days of keeping the Budget completely secret until it’s announced are over. So many of these measures need consultations with stakeholders and so on that things are bound to leak.”

While third parties may have been responsible for some of the leaks, the biggest calamity of the Budget preparation was of the Government’s own making.

For this Budget, there was a central strategic call which Reeves and the Prime Minister, Sir Keir Starmer, had to make.

As one Labour MP put it to The i Paper, would the Government “nibble” at a range of smaller tax measures that “together close the fiscal hole” or would they “go for one big, painful move” involving one of the three biggest revenue raisers: VAT, income tax, or national insurance.

From an economic point of view, the latter arguably makes more sense, but politically it was always going to be extremely difficult because Labour had ruled out increasing all three of those taxes in the party’s general election manifesto.

Despite the political peril, for weeks Reeves and Starmer hinted that an increase to income tax was coming. Particularly significant was that “scene setter” speech on November 4 in which the Chancellor talked about “each of us” having to “do our bit”.

The markets loved the Chancellor’s tone of fiscal discipline, with the UK’s cost of borrowing falling as a result. Then, on 13 November, it emerged that Reeves and Starmer had performed a screeching U-turn by junking the plan to hike income tax. Borrowing costs rocketed in response.

In a bid to limit the damage, Treasury sources subsequently briefed that the decision had been taken because a better than expected OBR forecast meant putting up income tax was no longer necessary.

However, it also reflected the serious fears among Labour MPs about the consequences of breaking such a totemic manifesto promise.

A Government source said: “The whole income tax U-turn was not part of some big strategy, but a genuine mistake they had to go back on when they realised it wasn’t worth breaking the manifesto.

“That and I think genuinely the numbers were a bit better than they had initially thought.”

The episode revealed how in trying to keep the Parliamentary Labour Party and the bond markets happy, Reeves is being pulled in different directions.

One Labour MP – who is an outlier in favouring greater spending restraint – told The i Paper: “The central challenge at the Budget is how to balance political pain with credibility in the bond markets.”

Another backbencher said that the interplay between the gilt market, the PLP, Treasury officials, and the media was “like a toxic 4-way relationship.”

As Reeves struggles to manage these competing demands, the stakes have been raised even higher by the questions hovering over Starmer’s own future, with the Prime Minister’s authority only weakened by a botched No 10 briefing operation earlier this month.

Call to reform Budget process

It has made it more important for the Chancellor to find money for policies which will please Labour MPs, such as fully abolishing the two-child benefit cap – a move which is now widely expected on Wednesday despite the £3.5bn price tag.

An MP from Labour’s ‘soft-left’ wing said that backbenchers would forgive Reeves tax rises if she delivered a “Labour Budget”, which “put the poorest in the country first”.

For some, the chaos of recent weeks has exposed how Britain’s Budget-making process is not fit for purpose.

In particular, the role played by the OBR – in which the Treasury goes to great lengths to convince the watchdog to score various policies as boosting growth, while also fine-tuning tax and spending to ensure it complies with its five-year forecast – is causing frustration.

A Labour politician said: “The way it works right now is not the way to run the sixth largest economy in the world. This is totally exacerbating the doom-loop and it is so much part of the state failure problem.

“[Treasury officials] are doing their best in the circumstances, but it does have to evolve. Whatever happens in the Budget, too much of it has been dominated by meeting the OBR’s requirements.”

The politician believed that a lot of Reeves’ public interventions in the run-up to the Budget were about “trying to pump the bond markets” with “sensible vibes” to get as “generous as possible an OBR scoring” (the watchdog takes in to account recent gilt yields when it produces its forecast).

The politician went on: “What I was surprised was that [the Government] so heavily briefed specifically about income tax, and then briefed before the [improved OBR forecast] that they’d made a political decision they couldn’t wear it, rather than finding a way to sell it as what it actually was – that the OBR had given them additional headroom, which was a win for their economic management, or at least their management of this bizarre tango that takes place.

“Getting the OBR to the best possible position is something that is an important part of the way the Treasury now operates, the whole of government now operates.”

After the bruising experience of this Budget, Reeves may herself reflect on whether there is a better way to plan the nation’s finances in future.

But whether she is the person delivering next year’s Budget will partly depend on how this one is received – by Labour MPs and bond traders alike.