Deep fear and skepticism as Rachel Reeves prepares for her big budget moment

It’s been a long time coming. If you think this Budget has been around for a long time, you would be right.

Not just because, by one senior MP’s count, the government has already presented 13 (yes, thirteen) different tax proposals before the final decisions are made public.

Or because of a growing pile of reports from different think tanks or research groups making useful suggestions that have also made headlines.

But because the budget process itself has been underway for months.

In July, Chancellor Rachel Reeves had the first meeting with aides in her Treasury office to begin planning.

“Everyone was getting ready to open Excel,” one attendee recalls, but Reeves announced that he didn’t want spreadsheets or Treasury dashboards.

Instead, he wanted to start by figuring out how to pursue his top three priorities, which he wrote down on A5-sized Treasury letterhead.

That trio is what he will stick to next week: reducing the cost of living, cutting NHS waiting lists and cutting the national debt.

The messages to the voting public – and each one contains an implicit message to the powerful financial markets: control inflation, continue spending huge amounts on public services, protect long-term cash on things like infrastructure, and try to rein in spending to address the country’s big, fat pile of debt.

Reeves’ team is confident the chancellor will be able to tick all three of those boxes on Wednesday.

But there is deep fear in his party, and skepticism among his rivals and in business, that Reeves’ second budget will instead be hampered by political limitations and contradictions.

Reeves herself will no doubt refer to the restrictions placed on her even before she stepped through the door of No 11 as chancellor.

Big debts. High taxes. Years of reduced spending in some areas left some parts of public services threadbare. Arguments about the past can be exhausted.

“Everyone accepts that we inherited a bad position,” a senior Labor figure told me, “but it’s fair that people expect things to get better.”

Some of the limitations on Reeves’ options are tightened by the Labor Party itself.

There is the original election manifesto commitment to avoid raising the big three taxes – income tax, national insurance and VAT – excluding those who earn the most for the Treasury coffers.

So what is now accepted in most government circles as the real-world effect of the government’s early doom-laden messages: Things will get worse before they get better.

In last year’s budget, Reeves opted to leave himself just £9 billion of so-called “headroom”; In other words, a little cash to cushion the government if times are tougher than expected, which is, in fact, what has happened.

A former Treasury minister, Lord Bridges, told the Lords: “This is not a fiscal cushion; it is a fiscal wafer, so thin and fragile that it will break at the slightest blow.”

Well, the Office for Budget Responsibility, the one in charge of calculating the official numbers, has broken it, calculating that the economy is performing worse than previously thought, leaving the chancellor short of cash.

You can read more about what it means here.

The size of the debts the country already has means that the markets no longer want it to go into more debt.

But perhaps most importantly, the limits on what Reeves can do in terms of cuts, spending or borrowing arise from the most important political fact at the moment: this government is not popular with its own MPs and does not always feel that its leaders are in charge.

Downing Street has already shown that it is willing to abandon plans that could save a lot of money if the groundwork is put in place vigorously enough.

Prime Minister Sir Keir Starmer and Reeves were forced to abandon cuts to the winter fuel subsidy in 2024, and to social care earlier this year. And there’s also the expectation that extra money will be on the way.

A senior MP told me: “They need to increase room for manoeuvre, do something big on energy costs and they need to do something for the soft left in [the] cap of two children: they have accompanied the people up the hill”.

It will be expensive, but Labor MPs hope at least some of the limits on benefits for large families will be reversed and help with energy bills.

For some members of the government it is deeply frustrating. Someone told me that Labor MPs “want everything for nothing; we should be the adults driving the car, not the children in the back.”

On Friday, as Reeves received the final figures from his big budget moment, multiple sources pointed to other decisions the government has made that make its job more difficult, areas where Labor has appeared to contradict or confuse – and even undermine – its own ambitions.

On some occasions the chancellor, backed by the prime minister, will say that growing the economy and helping businesses is his absolute number one priority.

But many businesses felt that their initial decision to make it more expensive for businesses to hire additional staff by increasing national insurance was pointing in the complete opposite direction, with many reporting that higher staff costs are making growing their businesses much more difficult.

Ministers may have expressed hope to cut regulation – with more than 80 different regulators setting rules, you can see why.

However, significant new protections for workers are being introduced, which means more rules.

Labor preached that it would offer political stability after years of Tory chaos. We are not in the realm of the party that rotates between prime ministers at a dizzying pace, at least not yet.

But the endless reshuffles at No 10, the very public questions about Sir Keir’s leadership and the frantic speculation about impending budget decisions do not coincide with Sir Keir’s stated aims to end the drama.

There are also details. The last time Transportation Secretary Heidi Alexander participated in the program, she promised more help for consumers to buy electric cars, which would make them cheaper.

But as Alexander prepares to return to the studio, the chancellor is rumored to be adding a new pay-per-mile charge for electric vehicles, which would make them harder to afford.

Late on Friday there were still negotiations in Whitehall over whether to make the tax on oil and gas companies less brutal, with some ministers arguing that borders should be softened so that companies do not withdraw from the North Sea and take their future investments in renewable energy elsewhere.

The contradiction is that Labor promises there will be savings on bills and thousands of jobs on offer if energy companies move faster towards green energy.

But the tax, which they raised last year, could drive away some of those same companies, and with it the promise of future growth. No government has a completely pure policy in all areas.

In an organization that spends over a billion pounds a year and makes thousands of decisions every week, it is foolish to imagine that they can all be perfectly aligned with a wider goal.

But even on Sir Keir’s side, as we have spoken many times, a common complaint about this government is the lack of clarity about its overall purpose.

A frustrated senior official recently told me that they sometimes ask themselves, “What are we all doing here?”

The pressure from the markets means that the chancellor will find it difficult to continue borrowing. Labor MPs would be allergic to any major spending cuts. And big tax increases aren’t exactly the first thing on the list for a public uneasy with an unpopular government.

The realities of politics can often make it difficult for governments to make smart economic decisions. Economic realities can often make it difficult for governments to make the best policy decision.

On Wednesday, Reeves will have to credibly combine both, with a series of options that will shape the future of this troubled government.

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