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Sir Keir Starmer will on Monday vow that this week’s Budget will “embrace the harsh light of fiscal reality” to move Britain off a path of decline, but he is facing growing criticism that planned tax rises will hit the “working people” he has pledged to protect.
In a speech before the fiscal event on Wednesday — the most important moment of his premiership so far — Starmer will promise long-term reforms and investment alongside tax rises and spending cuts to stabilise the public finances.
“It’s time we ran towards the tough decisions,” he will say, adding the UK needs to “embrace the harsh light of fiscal reality so we can come together behind a credible, long-term plan”.
The Budget is expected to contain up to £40bn of tax rises and spending cuts along with extra borrowing of about £20bn a year to fund investment in the NHS, schools, green energy and transport projects.
But chancellor Rachel Reeves is facing strong criticism over her plan to increase employers’ national insurance contributions by up to £20bn, a tax rise that economists say will be passed on to workers through lower wage increases.
Jeremy Hunt, shadow chancellor, said the rise in employer national insurance contributions was a backdoor way of clawing back his pre-election £20bn cut in employees’ national insurance contributions.
Paul Johnson, director of the Institute for Fiscal Studies think-tank, said it was “essentially undoing the cut”.
In 2021 the Office for Budget Responsibility, the fiscal watchdog, said that while the “statutory incidence of employer NICs is on businesses, we assume the economic incidence of the tax is passed through entirely to lower real wages in the medium term”.
Hunt said: “It is hardly avoiding a tax rise on working people when the OBR say that in the medium term the entire impact is passed through to employees though lower salaries.”
Reeves is also expected to freeze income tax thresholds beyond 2028 in the Budget, drawing more people into higher tax bands — in spite of Labour’s manifesto promise to protect “working people” by not increasing income tax, value added tax or national insurance.
Education secretary Bridget Phillipson repeatedly refused to say on Sunday whether the tax pledge applied to the whole parliament, while Reeves told The Observer only that Britons would not pay those tax rises “the day after the Budget”. Labour figures later said the pledge applied to the whole parliament.
Starmer will say in his speech that working people have suffered in the past from politicians ducking “honest, responsible, long-term decisions” and that “it is working people who pay the price when their government fails to deliver economic stability”.
“It is stability that means we can invest and reform that will maximise that investment,” he will say.
Reeves is expected to loosen her fiscal rules to invest roughly £20bn more annually by the end of the parliament, reversing cuts to capital spending planned by Hunt.
Reeves has been at pains in recent weeks to assure jittery financial markets that she will impose “guardrails” around her new investment plans, to demonstrate that projects backed by extra government borrowing will genuinely boost growth.
Starmer in his speech will prepare the country for a harsh Budget with tax rises of up to £35bn, albeit one leavened politically by a promise that extra taxes will help to rebuild public services including the NHS.
“We have to be realistic about where we are as a country,” Starmer will say. “This is not 1997, when the economy was decent but public services were on their knees. And it’s not 2010, when public services were strong but the public finances were weak. These are unprecedented circumstances.”
The Conservatives argue that Starmer misled voters about his planned tax rises, a claim denied by the prime minister.