Rachel Reeves signals Budget tax rises, saying ‘world has changed’

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Chancellor Rachel Reeves has signalled there will be big tax rises in her coming Budget, claiming that “the world has changed” and confirming that new official productivity forecasts will blow a hole in her fiscal plans.

Ahead of her speech to the Labour party conference on Monday, 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.

She declined to confirm that this would require large tax rises but said the markets should be reassured that she would “make the numbers add up” and she remained committed to fiscal discipline.

Reeves said last November 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.”

Speaking on the BBC, 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, including £5bn caused by the government’s retreat on planned welfare reforms.

She added: “This is where iron discipline comes in. It’s very important we maintain those commitments to economic stability.”

Reeves and Prime Minister Sir Keir Starmer have insisted their election promises on tax “stand”. They vowed not to increase income tax, national insurance or value added tax. Conservatives and some Labour MPs believe the choice of the word “stand” is intended to allow the chancellor wriggle room to break the pledge in her Budget on November 26.

Reeves will on Monday urge business leaders to focus on the threat posed by Reform UK, as part of a fierce attack by the Labour leadership on Nigel Farage’s populist party and what it has called its “racist” immigration policy.

She will use her speech in Liverpool to claim that Farage would go on a borrowing spree, disrupt the labour market and rip up an EU-UK trade deal. On Sunday, Starmer urged his party to prepare for the “fight of our lives” with Reform, which is leading in opinion polls but currently has only five MPs.

Reeves’ allies are frustrated that business leaders have failed to speak out against Farage and his economic policies, with one saying: “They have to wake up — they can’t be passive.”

“Who is standing up for Britain’s stability?” Reeves will ask in her speech. “A Labour government that is resolute in cutting interest rates and borrowing or a Reform party that cheered on Liz Truss’s mini-budget?”

“Who is standing up for Britain’s businesses? A Labour government that is forging a closer relationship with our nearest trading partners or a Reform party that talks Britain down and is hungry to cut us off from the world?”

Reeves will argue that Farage has made unfunded spending commitments, would disrupt trade and that his plan to deport immigrants who have a legal right to live in the UK would cause workplace chaos.

Starmer claimed on Sunday that Farage’s plan to abolish indefinite leave to remain (ILR) — the main route to permanent settlement in the UK — and force people to reapply for visas every five years was “racist”. 

“I do think it’s a racist policy,” he told the BBC. “I think it’s immoral and it should be called out for what it is.”

Starmer aides admitted that the use of the “R-word” was not pre-planned and the prime minister instantly clarified that he meant that Farage’s immigration policy was racist, not people who supported Reform.

Zia Yusuf, Reform UK’s head of policy, said on Sunday: “Labour’s message to the country is clear: pay hundreds of billions for foreign nationals to live off the state forever, or Labour will call you racist.”

On Monday new home secretary Shabana Mahmood will tacitly accept that Farage has tapped into public concern on migration by promising to tighten up rules on how immigrants can gain UK citizenship.

Mahmood will say that migrants will have to earn money in Britain, claim no benefits, have a clean criminal record and volunteer in the community to obtain permanent residency in Britain.

She will add that many British people feel things are “spinning out of control” around the issue of immigration. But she will argue that “patriotism, a force for good” is turning into something smaller, “something more like ethno-nationalism”.

Her proposed reforms build on a pledge the Labour government made earlier this year to extend the period immigrants need to be in Britain before they can apply for ILR from five to 10 years.