Chancellor Rachel Reeves has all but confirmed that Britain faces another round of tax increases in November’s Budget, refusing to repeat her previous pledge against further hikes as Labour’s annual conference opens in Liverpool under the shadow of economic turmoil and political unrest.
In a dramatic U-turn from her promise to business leaders last year, Ms Reeves told BBC Radio 4’s Today programme that “the world has changed” when pressed to repeat her statement to the Confederation of British Industry that she was “not coming back with more borrowing or more taxes.”
“Everyone can see that in the last year the world has changed and we’re not immune to that change,” the Chancellor said, citing wars in Europe and the Middle East, Donald Trump’s tariffs, and potential productivity downgrades from the Office for Budget Responsibility as factors impacting Britain’s economic outlook.
The admission comes as Labour faces a perfect storm of economic challenges, with government borrowing costs hitting their highest levels since 1998 and the party trailing Nigel Farage’s Reform UK by eight points in recent polling. The yield on 30-year gilts reached 5.25% in early September, whilst the pound has weakened against the dollar, adding to concerns about Britain’s fiscal stability.
Youth Unemployment Pledge Amid Economic Gloom
Attempting to strike a more positive note ahead of her conference speech today, Ms Reeves will pledge to abolish long-term youth unemployment, promising that every young person who has been out of work or education for 18 months will be offered guaranteed paid work.
“I can commit this government to nothing less than the abolition of long-term youth unemployment,” the Chancellor will tell delegates, echoing the achievements of the last Labour government’s New Deal programme. The scheme aims to ensure participants gain practical experience, skills, and pathways into full-time employment.
Ms Reeves will declare: “I will never be satisfied while too many people’s potential is wasted, frozen out of employment, education or training. It’s bad for business, bad for taxpayers, bad for the economy and it scars people’s prospects throughout their lives.
However, the pledge comes with no clarity on what type of work would be offered or how the programme would be funded, raising questions about its viability given the current fiscal constraints.
November Budget Looms Large
The Chancellor’s reluctance to rule out tax rises has intensified speculation about what measures might be included in the 26 November Budget. Economists estimate the government faces a £40billion funding gap, with pressure mounting from within Labour to reverse unpopular decisions whilst maintaining fiscal credibility.
The Institute for Government has warned that Ms Reeves left herself just £10billion of headroom against her fiscal rules after last October’s Budget, which included £40billion of tax rises. This represents “a truly tiny margin” given that five-year borrowing forecasts typically move by around £15billion every six months.
Nigel Green, chief executive of deVere Group, warned that the combination of strained public finances and Reform UK’s surge in the polls leaves Ms Reeves with little room to manoeuvre. “If the government were to flinch and rely on borrowing, the bond market would punish it instantly. The UK cannot afford a repeat of the Truss-era turmoil of 2022.”
Conference Under Pressure
The Liverpool conference represents a crucial moment for Labour to reset its narrative after a tumultuous period marked by Angela Rayner’s resignation as deputy leader, the dismissal of Lord Mandelson as US ambassador over his links to Jeffrey Epstein, and persistent speculation about Andy Burnham mounting a leadership challenge.
During her speech, Ms Reeves was interrupted by a pro-Palestinian protester shouting about “genocide.” The Chancellor responded that she “understood” the protester’s cause but noted the UK government had recently recognised the state of Palestine, adding that Labour was “now the party of government, not the party of protest.
The incident underscored the multiple pressures facing the party from different wings, with left-wing MPs demanding an end to the two-child benefit cap at a cost of £3.5billion annually, whilst markets demand fiscal restraint.
Economic Headwinds Intensify
The economic backdrop to the conference could hardly be more challenging. Britain’s economy is forecast to expand by less than 1.5% in 2025, whilst inflation is expected to hit 4% in September, double the Bank of England’s target. The combination has reduced expectations for interest rate cuts, with markets now pricing in just one reduction this year compared to three or four previously anticipated.
Oliver Faizallah, head of fixed-income research at Charles Stanley, warned: “We are potentially looking at a stagflationary environment with higher inflation and poor growth. The Labour government may be forced to reduce spending, increase taxes, or increase borrowing. Neither of these are attractive options when the economy is stagnating.”
The government’s fiscal challenges have been exacerbated by previous policy reversals, including the U-turn on winter fuel payments for pensioners and the reversal of planned cuts to disability support, which together cost around £6billion annually.
Tax Rise Options Under Consideration
Whilst Ms Reeves has pledged to maintain Labour’s manifesto commitment not to raise the headline rates of income tax, National Insurance, or VAT, several other revenue-raising measures are reportedly under consideration.
These include extending the freeze on income tax thresholds beyond 2028, which acts as a stealth tax by dragging more people into higher brackets as wages rise. The Treasury is also reviewing potential changes to capital gains tax, inheritance tax rules, and new levies on the financial and gambling sectors.
Some left-wing Labour MPs have pressed for a wealth tax, though Treasury insiders suggest Ms Reeves has privately ruled this out, concerned about the impact on business confidence and international competitiveness.
Political Consequences Mount
The Conservative Party seized on Ms Reeves’s comments, with their press office posting on X: “Rachel Reeves has strangled growth and put people out of work with her tax hikes. Now she’s plotting new ways to take more of your money, having promised not to. Tax rises are coming.”
Business leaders have warned that significant tax rises in November would add to challenges facing households and companies, potentially dampening growth further. The timing means Ms Reeves will have the party’s autumn conference to shape the political narrative, but with Reform UK setting the agenda on immigration and Labour struggling to articulate a coherent economic strategy, the space for manoeuvre appears increasingly limited.
As delegates gather in Liverpool, the mood is far from the optimism that accompanied last year’s post-election conference. With borrowing costs at multi-decade highs, the economy stalling, and political rivals circling, Ms Reeves faces the unenviable task of preparing Britain for more economic pain whilst somehow maintaining party unity and public support.
The Chancellor’s speech today will be scrutinised not just for policy announcements but for any hints about the scale of tax rises to come. With the November Budget just eight weeks away, Britain’s businesses and households face an anxious wait to discover how much more they will be asked to contribute to fixing what Labour calls the Conservatives’ “black hole” in the public finances.
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Image Credit:
Rachel Reeves — photo by Zara Ferrar / HM Treasury, licensed under the UK Open Government Licence v3.0
