The four audiences Reeves’ ‘high-wire’ Budget must satisfy

The moment Rachel Reeves sits down on Wednesday after delivering her second Budget speech — perhaps the defining event of this parliament — Downing Street will anxiously start assessing how it has landed with four key audiences.

The first are the 400 or so Labour MPs sitting around Reeves, all of them concerned about the party’s dire standing in the polls, some of them plotting to remove her boss Sir Keir Starmer. They will be waving their order papers in orchestrated glee, but what do they really think?

While Downing Street officials gauge the party mood, Treasury staffers will be more worried about the second key Budget constituency: the markets. “If bond yields tick down, then everything will be all right,” said one person close to the chancellor.

The third audience is Britain’s business community. “My assessment is that their mood will be muted to grumpy,” admitted one senior government official. Reeves has spent weeks trying to persuade bosses to back her strategy, but will it work?

And finally, the fourth constituency is the British public. The chancellor is inflicting higher taxes on voters for the second Budget in a row, but can she do enough with other measures to cut the cost of living and boost the NHS to alleviate the inevitable backlash?

Reeves needs a lot of things to go right on Wednesday if she is to somehow reconcile the interests of these four audiences and persuade the country that the Budget lays the foundations for growth, lower interest rates and stable public finances.

“I will show the media, I will show the Tories, I will not let them beat me,” a defiant chancellor told Labour MPs on Tuesday night. “I will be back next year, I will be back the year after that and the year after that.”

But not everyone is convinced. One minister said: “We need to do an incredible selling job on this Budget. Let’s put it this way: our track record in that regard hasn’t exactly been great so far.”

The journey to Wednesday’s Budget — a shambolic saga of leaks, U-turns and last-minute policy shifts — has weakened confidence in Reeves, already the least popular chancellor for at least 50 years, according to Ipsos.

Yet she remains bullish, prompting some senior Tories to speculate that Reeves may yet surprise MPs by revealing that the hole in the public finances is not as deep as previously thought. “She must have something up her sleeve,” said one shadow minister.

The Labour party is Reeves’ first audience, with Downing Street fretting that some MPs are planning a coup against Starmer. That fear was the backdrop to the decision to abandon original plans to break an election pledge by raising income tax rates.

Labour MPs already appear to have grabbed the pen from Reeves when it comes to writing the Budget, having vetoed her plans to cut welfare spending by £5bn and slash winter fuel payments.

Reeves is expected to spend a further £3bn on ending the two child benefit cap — a move demanded by Labour MPs and initially resisted by the chancellor. Those three policies combined have added around £10bn to the welfare bill and the size of Reeves’ fiscal repair job.

The chancellor and Starmer seem happy for the Budget to be seen in Westminster as tacking to the left, as they attempt to secure the party leadership. “It’s a Labour Budget, it’s a progressive Budget, it’s a Budget I’m proud of and I hope you are too,” Reeves told MPs.

A “mansion tax” on homes worth more than £2mn will appeal to Labour MPs, although the plan to freeze income tax thresholds and raise up to £10bn a year will hit the party’s core voters hard. If the Budget’s many tax-raising measures start to unravel, Reeves will be in serious political trouble.

Reeves must also face the bond markets. Her aim is to reassure markets that the public finances are back on a firm footing, with speculation by analysts she could increase the “buffer” against her fiscal rules from £9.9bn to £20bn or more.

The markets were shaken by her U-turn on a planned income tax rise — seen as another surrender by the chancellor to Labour MPs — but many in the City still see Reeves as a thin red line between them and leftwing backbenchers.

However markets need to see more than this to be convinced that she has fiscal policy properly under control, with some analysts expressing concerns that many of the tax rises are backloaded until later in the parliament.

The chaotic feel of Budget preparations has also concerned investors. “I can’t remember a Budget process quite like this,” said Andy King, a former Office for Budget Responsibility official who is now at consultancy Flint Global.

If screens turn red during or after Reeves’ speech on Wednesday, that will be seen as a big setback for the chancellor. She wants to win the market’s confidence, helping to drive down debt servicing costs which account for about £100bn a year.

When it comes to business, the third audience, Reeves and her team have tried to convince FTSE 100 bosses that while they will not like some of the measures in her package, she has spared them from the kind of £25bn national insurance raid she inflicted on companies last year.

Companies and banks have been urged by Reeves’ team to speak out in support of measures in the Budget that bolster growth, with allies of the chancellor insisting that a collapse of the Starmer/Reeves project could herald a much scarier Reform UK government instead.

“Rachel Reeves has been reduced to desperately begging banks to act as human shields to endorse her dreaded Budget,” said Andrew Griffith, Tory business spokesman.

The tax raid on companies will be less explicit this year than in Reeves’ first Budget, although her plan to tighten the rules on salary sacrifice schemes has been described as a £2 billion take through the back door. 

Currently workers can pay up to £60,000 a year into their pension without being liable for national insurance but the Treasury plans to cap this to £2,000.

One chief executive said that getting rid of salary sacrifice is a “turkey of a policy” which would mean lower wages, less money being saved and the cost to employers rising.

Bosses in the betting sector are already in a brace position for higher taxes and large retailers will also be furious about the Treasury’s backtrack on carving out retail from the top bracket of business rates.

“It could have been worse for business,” said one minister, noting that Reeves had ditched plans to increase taxes on limited partnerships, used by accountants and lawyers.

One ally of Reeves said: “The reaction will be muted to grumpy. There is nothing in here which is overtly anti-business but lots of small things add up.”

Reeves’ fourth target audience is the electorate. But with a general election still expected to be at least three years away, Reeves is using the Budget to try to create the foundations for a Labour victory in a poll which must happen by 2029.

Some of Reeves’ measures will be deeply unpopular, including the “stealth” increase in income tax by freezing thresholds for a further two years, a policy she previously admitted would impact “working people”.

The fact that Reeves is putting up voters’ tax bills to fund Labour’s inability, or unwillingness, to control welfare is already a glaring Tory attack line. A recent poll found that 59 per cent of voters wanted to keep the two-child benefit cap, against only 26 per cent who wanted it removed.

Reeves has tried to soften those blows with targeted interventions to tackle the cost of living, including freezing some rail fares and prescription charges. She has also promised to use the Budget to support the NHS.

But Reeves is braced for a voter and political backlash. “It’s a Year One Budget in Year Two,” admitted one Labour MP, who argued Reeves should have taken tough tax decisions while she still had some political capital.

One Treasury veteran believes that Reeves could fall between two stools: ducking the tough choice on raising income tax rates because she is too politically weak, while introducing risky smaller tax rises. “We are entering omnishambles territory,” the former official said.

“It looks like the plan is to do just enough to be credible while making the sort of decisions which will enable them to live to fight another day. So they are on a high wire; previous experience suggests they will fall off it.”