Budget 2025: Why Wednesday’s Statement Could Make or Break Keir Starmer’s Government
Key Takeaways:
- High-stakes Budget for Labour — Rachel Reeves’s second major Budget will deliver more than £30bn in tax rises, testing the government’s credibility as it breaks previous pledges and faces weakening public trust.
- Fiscal reality driving tough choices — A £20bn productivity downgrade, global economic headwinds, and costly policy reversals are forcing Labour to rely on threshold freezes, welfare decisions, and new levies to stabilise the public finances.
- Political jeopardy for Starmer — With rising internal dissent, broken manifesto promises, and pressure to show real improvements on the cost of living and NHS waiting times, the Budget could determine whether Starmer regains authority or accelerates a leadership reckoning.
Wednesday’s Budget is shaping up to be one of the most consequential fiscal events in recent political memory — not only for its scale, but for what it reveals about the Labour government’s strategy, stability, and survival. For Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves, the stakes could hardly be higher. A year and a half into government, the political goodwill of their 2024 landslide is evaporating under pressure from a stubborn cost-of-living crisis, harsh fiscal realities, and a growing sense of disillusionment among their own MPs.
As Sky News political editor Beth Rigby notes, Budget day is not just about tax and spending measures. It is a test of leadership — of whether this government still commands enough trust, discipline, and clarity to steer the country through increasingly choppy economic waters.
A “Big” Budget in Every Sense
The chancellor’s second major fiscal plan will be big in three ways:
- Big tax rises, expected to surpass £30 billion
- Big implications for public services and the economy
- Big political jeopardy, with Labour’s internal unity now under visible strain
One senior Labour figure summed up the challenge succinctly:
“There are lots of different audiences to this budget. The markets will be watching, the public on the cost of living, the party on child poverty, and business will want to like the direction we’re travelling.”
The Budget’s core objectives — reducing NHS waiting lists, cutting national debt, and easing the cost of living — reflect the priorities Labour has campaigned on since 2023. But meeting these goals without borrowing more or slashing public services requires tax increases on a scale that risks opening deep political wounds.
Economic Headwinds Tighten the Squeeze
Reeves’s task is complicated by forces beyond her control. The Office for Budget Responsibility (OBR) is set to downgrade UK productivity forecasts, blowing a £20 billion hole in expected revenues. External shocks — notably Donald Trump’s tariffs on global imports — threaten higher prices and lower trade volumes.
Yet some of Reeves’s fiscal headaches are self-inflicted, including:
- The reversal of cuts to winter fuel allowance
- Retreats on previously announced welfare reductions
Together, those U-turns carry a £7 billion cost the Treasury must now absorb.
The chancellor has ruled out borrowing to plug these gaps, wanting instead to reassure markets that Labour will uphold fiscal discipline. That may indeed help keep interest rates and inflation subdued — but it also forces Reeves to rely heavily on raising taxes.
The Return of Big Tax-and-Spend Politics
Only a year ago, Reeves implemented the largest tax-raising Budget in a generation, generating £40 billion in new revenue. She insisted at the time she would not be coming back for more. But she is — and the political cost could be severe.
Starmer’s refusal, during the G20 summit in South Africa, to recommit to his manifesto promise not to raise income tax, VAT or national insurance tells its own story. Labour looks set to break some of its most high-profile election commitments.
The Income Tax Threshold Freeze
The single largest revenue raiser will come from an extended freeze on income tax thresholds until 2030. Fiscal drag — the process by which wages rise with inflation but thresholds stay still — pulls workers into higher tax bands without technically increasing tax rates.
This move directly contradicts Reeves’s statements from the 2024 Budget, where she argued:
“Freezing the thresholds will hurt working people and take more out of their payslips.”
Those words will return this week, recycled by critics and replayed by political opponents.
A Near-Miss: Raising Income Tax Rates
At one point, Labour considered raising the basic income tax rate, which would have clearly delivered the £20 billion needed in one swing. But cooler heads prevailed. A tax hike of that magnitude — the first in half a century — risked destroying trust permanently.
Too many Labour MPs compared the idea to the tuition fee U-turn that crippled the Liberal Democrats in 2015. Starmer, already worried about diminishing public confidence, backed away.
Lifting the Two-Child Benefit Cap — A £3 Billion Gamble
In a dramatic move, Reeves will announce the removal of the two-child benefit cap at a cost of **£3 billion per year**. Starmer refused to include this in Labour’s manifesto, citing affordability. Now, despite public scepticism, the government is pressing ahead.
Labour MPs will welcome the decision. Polling, however, indicates the public may not.
The narrative becomes even more complicated when viewed in context: only months ago Labour watered down welfare savings, and now they are increasing welfare spending. Conservatives are already preparing their attack lines on a rising benefits bill, projected to hit £100 billion by 2029-30 due to long-term sickness costs.
More Revenue Measures — And More Risks
To raise the additional £30 billion required, Reeves is expected to unveil a mix of taxes that includes:
- A mansion tax on high-value homes
- A new gambling levy
- Possible tourism taxes
- Even a proposed milkshake tax
Within government, there is real fear that one small measure could ignite a major backlash — similar to George Osborne’s infamous 2012 “pasty tax”, which became a symbol of disconnect and elitism.
The Trust Deficit: Labour’s Growing Vulnerability
Seventeen months into government, Labour’s biggest vulnerability isn’t inflation, immigration or foreign policy. It’s trust.
Starmer campaigned on a promise of economic stability without turning Britain into a traditional tax-and-spend Labour administration. But reality appears to be undermining that narrative:
- The 2024 Budget was supposed to be “once in a parliament.”
- Now there is another huge tax rise.
- Labour said lifting the two-child cap was unaffordable.
- Now it’s government policy.
- Labour pledged to protect working people from tax rises.
- Now thresholds are being frozen until 2030.
The gap between promise and practice is widening.
A Government Struggling to Tell Its Story
Labour insists it is delivering real improvements, from expanding free childcare to raising the national living wage. The government will emphasise:
- School breakfast clubs
- Millions of public sector workers receiving above-inflation pay rises
- Increased NHS investment
Reeves is determined to present a coherent “cost of living grip” narrative. But the public, after 18 months, is unconvinced. Rising living costs, flat growth, and persistent NHS waiting lists undermine the message.
Even allies admit communication failures have contributed to a sense that little has changed since 2024.
Labour’s Internal Strains: A Government in Flux
Adding to the turbulence, Starmer’s administration is wrestling with internal instability:
- Downing Street has cycled through multiple senior advisers.
- The Deputy Prime Minister resigned over tax underpayment.
- Britain’s ambassador to the US, Peter Mandelson, was removed due to his links with Jeffrey Epstein.
The drumbeat of leadership speculation — faint but growing — now echoes through Westminster.
What This Budget Means for Starmer’s Survival
Wednesday’s Budget is more than a fiscal event. It is a referendum on Labour’s competence, credibility and cohesion.
Starmer says he is “optimistic” and insists the country has a “great future” if Labour gets this right. But he must convince:
- Voters, who feel poorer than they did in 2024
- Labour MPs, who increasingly worry about broken promises
- Markets, who want stability
- Public sector workers, who want investment
- Businesses, who want clarity
- Internal factions, who are whispering about alternatives
Budgets are rarely existential. This one is.
If Labour misjudges the public mood, mishandles the political fallout, or deepens the trust deficit, Wednesday may become the moment critics point to as the beginning of the government’s unraveling.
But if Reeves delivers a Budget that balances economic realism with political empathy — and if Starmer can sell the story convincingly — Labour may yet regain momentum.
For now, the prime minister enters Budget week not as a triumphant reformer, but as a leader fighting to hold his party together.
And in politics, survival is sometimes the biggest victory of all.
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