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Conservative leader Kemi Badenoch will on Tuesday draw up the battle lines for next week’s Budget by accusing chancellor Rachel Reeves of planning to put up taxes on working people to fund a bloated benefits bill.
Reeves signalled last week she was reluctantly prepared to lift the two-child benefit cap, a policy introduced by the last Tory government in 2017 but which is hated by many Labour MPs.
The chancellor is well aware of the political risks of adding to Britain’s welfare bill at a time of big tax rises, but deputy Labour leader Lucy Powell is leading party demands for decisive action in the November 26 Budget.
Badenoch will say: “They’re hiking taxes on people in work to give handouts to people on benefits, the last group of people who might still vote Labour.”
Reeves last week dropped plans to increase income tax rates, amid fears in Downing Street that breaking a core Labour election manifesto pledge on taxation would fuel a mutinous mood among the party’s MPs, but the move sparked a sell-off in the gilt market on Friday.
The chancellor’s position is more precarious now because Labour MPs still want to scrap the two child benefit cap — a policy which could cost up to £3.5bn a year — when Reeves’ biggest revenue-raising proposal has just been axed.
People briefed on the chancellor’s revised plans have said she would rely heavily on what has been dubbed the “smorgasbord” approach of increasing a range of narrowly drawn taxes.
Government officials declined to say whether Reeves was having second thoughts on whether she could afford to scrap the two-child cap in a single Budget.
One minister has said that scrapping the cap in its entirety in the current climate would be “mad”.
Reeves’ allies made it clear in July that the move was unaffordable after Labour MPs forced her to abandon plans to cut the welfare bill by £5bn.
But under pressure from senior Labour figures — including Powell and education secretary Bridget Phillipson — Reeves last week appeared to accept she would have to find the money to end the two-child cap.
The chancellor told the BBC it was not right that children in bigger families were “penalised” through “no fault of their own”.
Badenoch will on Tuesday rehearse what will be one of the main Conservative attack lines on the Budget when she says: “Labour are raising taxes to pay for Keir Starmer’s weakness on welfare cuts.”
The Conservatives have said they would reinstate the cap on benefits for families with more than two children, a policy deemed to be very popular with the “working people” whose interests Reeves has vowed to defend.
UK government bond yields steadied on Monday after the sell-off provoked by the income tax U-turn, with 10-year borrowing costs falling 0.04 percentage points to 4.54 per cent.
But it represented only a partial recovery, after their 0.14 percentage point jump on Friday.
Investors were left questioning how Reeves can sufficiently repair the public finances without the rise in income tax rates, with some fretting that other measures could drive up inflation or fall victim to political opposition.
“The challenge for chancellor Reeves is stark,” said Guillaume Rigeade, co-head of fixed income at asset manager Carmignac, pointing to a mixture of weaker growth, higher debt servicing costs and a likely downgrade to official productivity forecasts.
The Treasury must “rebuild credibility without choking an economy already at risk”, he added.
A Labour spokesman said the last Conservative government had left a toxic economic legacy.
“Welfare and debt spiralled on their watch, and public services were cut down to the bone,” they added.
