Keir Starmer to Embrace ‘Harsh Light of Fiscal Reality’ in Key Budget

(Bloomberg) -- UK Prime Minister Keir Starmer said his government would “embrace the harsh light of fiscal reality,” as Chancellor of the Exchequer Rachel Reeves prepares to reveal a historic package of tax hikes and extra borrowing in a make-or-break budget on Wednesday.

“It’s time we ran towards the tough decisions, because ignoring them set us on the path to decline,” Starmer is due to say in a speech on Monday, according to remarks pre-briefed by 10 Downing Street. “This is an economic plan that will change the long-term trajectory on British growth for the better.”

Starmer and Reeves are preparing a budget that will define UK politics for the rest of the decade. The government is hoping to set up an election win in five years’ time by stabilizing Britain’s public finances now through as much as £40 billion ($51.9 billion) of tax hikes and spending cuts — including raising payroll taxes for businesses, capital gains tax and inheritance tax — combined with an investment ramp up funded by more borrowing, in a bid to spur economic growth.

The budget will deliver “honest, responsible, long-term decisions in the interests of working people,” Starmer is due to say. “It’s stability that means we can invest, and reform that will maximize that investment.”

The budget is a pivotal moment for Starmer, who wants to show progress on the “change” pledge that helped win a landslide election victory in July. Since that win, his popularity ratings have declined amid controversies over the taking of freebies by Labour politicians, an unpopular decision to curb winter fuel payments to pensioners and internal ructions in his top team.

The government will paint the tax hikes coming in Wednesday’s budget as necessary to fill a £22 billion black hole they say they inherited from the previous Conservative administration, while also being needed to boost spending on public services. Reeves will pair those tax hikes with a significant change to Britain’s fiscal rules, opting to target a new debt measure that would allow her to borrow as much as an extra £70 billion over the course of the Parliament.

“These are unprecedented circumstances,” Starmer is due to say on Monday. “Long-term challenges ignored for 14 years. An economy riddled with weakness on productivity and investment.”

Yet the budget is also a high-wire moment for Starmer and Reeves because of the potential backlash from the public and financial markets. Labour is already facing criticisms that it’s due to break its manifesto pledges with its planned tax hikes, particularly over the prospective increase in the national insurance payroll tax for businesses. 

Labour’s manifesto ruled out raising taxes on “working people,” and explicitly ruled out hiking income tax, national insurance and VAT. But Starmer and his team have struggled when questioned over the definition of a “working person.” On Sunday, Education Secretary Bridget Phillipson declined to comment on whether a small-business owner was a “working person,” even though they would be set to pay more in tax if Reeves delivers an expected increase in national insurance for employers.

“Working people will not see higher taxes in the pay slips that they receive,” Phillipson said on BBC TV. “I can’t speculate on precise tax measures.”

Starmer and Reeves also have to worry about how financial markets will react to their fiscal plan. UK government borrowing costs have risen in recent days in response to Reeves signaling that she intends to borrow more, and markets are watching for reassurances over the extent of the chancellor’s borrowing plans.

“Of course there are questions about how public money is spent,” Phillipson said, when asked about Labour’s borrowing plans. The government will borrow “in a way that is responsible and credible, with clear fiscal rules that drive those decisions,” she said.

Other measures to expect in the budget include:

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