On 23 September, the budget board – the joint No 10 and Treasury committee set up to shape last week’s make-or-break financial statement – met for the first time in Downing Street. Minouche Shafik, the prime minister’s newly appointed chief economic adviser, turned to Torsten Bell, the Treasury minister, and asked him to set the scene.
Speaking fast and furiously, Bell embarked on a foul-mouthed tirade, laying bare the scale of the economic and political challenges facing the government. “It was ‘fuck this, fuck that, we’ve got to fuck them all and then we’ve got to fuck them some more’,” one source said.
Lady Shafik, the courteous, well-spoken former deputy governor of the Bank of England and ex-president of the London School of Economics, looked “completely shocked”, according to another senior figure who was present. “It was Torsten at his most excitable and pumped up. In the end, you did think: ‘Please, just stop talking.’”
That meeting set the tone for the fractious, fraught and frenetic – or, in the words of one Labour peer, “absolutely fucking awful” – two months that followed. The buildup to this year’s budget was the most chaotic in living memory, beset by leaks, rows, U-turns and briefing wars.
On Friday, the disarray continued as the Office for Budget Responsibility (OBR) revealed that when Rachel Reeves delivered her gloomy 8am “scene-setter” speech in Downing Street preparing the ground for tax rises, she already knew that the outlook for the public finances had in fact improved.
This is now a question of trust in the chancellor, as well as confidence in the financial markets. And there are real-world consequences. Andy Haldane, the former chief economist at the Bank of England, said the “circus” of budget speculation had “without any shadow of a doubt” had a direct impact on the economy.
The stakes could not have been higher. With the economy flatlining, growth elusive and Labour haemorrhaging support in the polls, the budget was the chance to reset the fortunes of both the country and the government. Yet over the course of an extraordinary fortnight at Westminster, it went from a defining political event, involving a manifesto-busting income tax rise and a radical reshaping of the tax system, to an incremental tidying-up exercise with more welfare spending, based around an extension of the Conservatives’ income tax threshold policy.
The budget board was supposed to ensure that No 10 and No 11 were marching in lockstep towards a coherent plan on which both the prime minister and the chancellor agreed. In fact, there were tensions right from the start, not only between Downing Street and the Treasury but also within the two. To make matters worse, these crucial policy debates were taking place against a backdrop of questions about the prime minister’s leadership and a growing sense of paranoia in the No 10 bunker.
‘Chaos in the party means decisions are being forced on the chancellor that wouldn’t have been’
Jim O’Neill, ex-minister
Insiders say the fundamental battle was between politics and economics, or whether to prioritise the views of Labour MPs, who hold Keir Starmer’s fate in their hands, over the needs of the country.
Jim O’Neill, the former Treasury minister and Goldman Sachs chief economist who advised Reeves in opposition, is in no doubt about which side won. “I think it’s definitely politics before national interest,” he said. “The horrible truth is that what’s happened is linked to issues around the style of the prime minister’s leadership, and the resulting chaos in the Labour party has meant decisions are being forced on the Treasury and the chancellor that otherwise wouldn’t have happened.”
He said he was baffled as to why the government had been so easily kicked away from a single-minded focus on growth. “I think it’s greatly to do with the personality and nature of the prime minister, who, as recent events have shown, doesn’t appear to have a great, committed strategic vision and so he gets thrown by the wind.”
A former Labour cabinet minister from the Tony Blair era said: “The politics beat the economics. It was a survival budget. If you were being unkind you would say it was a budget for the few – Keir and Rachel – not the many. It was definitely not a budget for the country. The idea of putting up taxes to hand out benefits is the quintessential vote-losing strategy. The terrifying thought is that the backbenchers are now driving government policy.”
Allies of the chancellor insist, however, that she was in control of the process all along. “This is Rachel Reeves’s budget, not the budget board’s budget or the Treasury’s budget or the OBR’s budget,” one said. “Obviously, in any budget process, you look at different options but the overall budget strategy never changed.”
The story of the budget began in July, soon after the chancellor had been seen crying in the House of Commons during prime minister’s questions – a rare public display of emotion blamed on a “personal matter”.
Reeves told her officials that she had three priorities for the budget: cutting the cost of living, tackling NHS waiting lists, which meant maintaining capital investment, and – crucially – doubling the fiscal headroom to £20bn. There were big financial implications and the chancellor instructed the Treasury team to draw up a list of measures that would deliver her aims.
The following month, Bell, the former chief executive of the Resolution Foundation thinktank, was appointed to help lead the budget preparations. Intelligent and energetic, as well as prone to swearing in meetings, he threw himself with vigour into the process, compiling dozens of ideas.
Then, in September, Starmer brought Shafik into No 10 as his chief economic adviser. One cabinet minister said the prime minister was determined to “assert himself more over the Treasury” in the run-up to the budget after what Downing Street had perceived as a series of missteps, including the decision to scrap the winter fuel allowance for all but the poorest pensioners and the increase in employer national insurance.
Minouche Shafik
Shafik and Bell were appointed joint chairs of the budget board. The committee also included Darren Jones, the prime minister’s chief secretary, Varun Chandra, his business adviser, Tim Allan, Downing Street communications director, Morgan McSweeney, chief of staff, Vidhya Alakeson, deputy chief of staff, and Stuart Ingham, director of strategic interventions.
From the chancellor’s team, Katie Martin, then chief of staff, and press secretary Ben Nunn were joined by senior Treasury officials. One source said the circle was deliberately wide because Reeves wanted to make sure everyone’s hands were “dipped in the blood” of the difficult decisions she knew had to be made.
As the discussions intensified, the budget board sometimes met two or three times a week. There were also weekly bilaterals between the prime minister and the chancellor. The idea was to ensure the closest possible collaboration, but differences soon began to emerge. One senior figure said the defining division was not between No 10 and No 11, as has often been the case in the past, but between “pragmatists and ideologues” across government.
Bell and Shafik might have different personalities and backgrounds but they share a common view about how the economy should be reformed. Both believe there must be a greater focus on intergenerational fairness, with resources transferred from older to younger people. Both have advocated a shift from taxing income to wealth.
The Resolution Foundation’s Economy 2030 inquiry, which Shafik chaired and Bell oversaw, proposed the introduction of a new, more proportional property tax. It called for the pension triple lock to be scrapped, the two-child benefit cap to be abolished and a vehicle tax to be introduced for electric cars. “Wealth needs to take more of the strain,” the paper said. All these ideas were immediately on the table for the budget board.
In her first week at No 10, Shafik asked the policy unit to prepare a paper setting out the options for reinventing council tax and stamp duty. She wanted to see sweeping changes to property taxes but her proposals were blocked by political figures in Downing Street who feared there would be “too many losers” in middle England.
The prime minister’s economic adviser also suggested that rejoining the EU customs union would be one of the most effective ways of generating growth. This too was quickly knocked back. Meanwhile, the Treasury resisted the idea of scrapping the increasingly expensive pension triple lock, on the grounds that the chancellor was already fighting on too many fronts.
“There have been some areas where Minouche’s ideas have run up against political reality,” one insider said.
Bell pushed the idea of an annual mansion tax, based on a percentage of the total value of a home. It would have meant people with a house worth £3m paying £30,000 a year. Jokes were made about which members of the budget board might be affected. Bell also backed an exit tax for those taking assets out of the country as a precursor to equalising capital gains tax with income tax.
These ideas were presented as “red meat” to Labour MPs but they were supported by Treasury civil servants too. “The trouble is, there’s an alliance between Treasury officials and ideologues on the left,” one Whitehall source said.
They added: “A lot of this is driven by envy – there are people working in the Treasury who are very clever, they have good degrees, they have chosen to go into the civil service but they look at their contemporaries who are earning multiple times what they earn and they resent it.
“When the Tories were in power, they pushed against that but now the ideologues in the Labour party say: ‘Great, let’s do it and more.’ There’s a hostility to wealth.”
‘Business was shaken after the last budget and the voice of business in this one was loudly heard’
Labour minister
The plans were resisted in the cabinet by Peter Kyle, the business secretary, and in budget board meetings by Chandra and Allan. Both advisers created their own businesses before going into No 10 and argued that it was crucial for Labour to support enterprise and aspiration. An attempt to raise corporation tax was also seen off.
“Business was shaken after the last budget, and the voice of business in this budget process was prominent and very loudly heard,” one minister said. “An exit tax is one of those things that looks good on paper, in rooms very far removed from the experience of what it takes to create a company, wealth and jobs,but not in the real world.”
In the end, Reeves and Starmer weighed in behind the pro-business faction. “Rachel is far more pro-business than she is given credit for,” one senior figure said. “She knows that you need the wealth creators if you want growth.”
The biggest decision the chancellor and prime minister had to make was whether to break the Labour manifesto commitment not to put up the basic rate of income tax, national insurance or VAT.
When Reeves delivered her televised 8am speech on 4 November, it was taken – rightly – as a clear signal that income tax was going up. Behind the scenes, she had signed off a plan drawn up by Bell and Shafik to introduce a 2p increase in income tax, offset by a similar reduction in employee national insurance.
The “two up, two down” scheme, based on an idea from the Resolution Foundation, had already been submitted to the OBR as one of the key measures that was expected to be included in the budget.
Even at that stage, nothing was final, but in the Treasury, Downing Street and around the cabinet table, there was a widespread assumption that this would be the leading announcement on 26 November. As one Labour source said: “It was a choice between breaking the narrow manifesto choice on tax or breaking the wider manifesto pledge to deliver change.”
Then the prime minister and his chief of staff panicked. Over the weekend, Starmer, Reeves and key aides met to discuss the income tax plan. It was Remembrance Sunday, so the prime minister was in London for the service at the Cenotaph. By Monday 10 November – two days before the final budget plans had to be submitted to the OBR – insiders were describing a “serious wobble” in No 10.
Having been forced to cave into Labour backbenchers on the winter fuel allowance and welfare reform, McSweeney worried that Starmer did not have the political authority to force through the first rise in the basic rate of income tax for 50 years.
At the very last minute, Reeves, under pressure from Starmer, switched course and opted for the “smorgasbord” of tax rises, combined with the abolition of the two-child benefit cap that is so hated by Labour MPs. Treasury officials initially attempted to suggest that the plan to raise income tax rates was dropped because of rosier forecasts from the OBR, but in fact – as Richard Hughes, the chair of the financial watchdog, revealed on Friday – the figures had not changed for more than a fortnight.
A downgrade to the UK’s predicted economic productivity had been compensated for by an increase in tax receipts because of higher wages and inflation. The position continued to improve, and by the end of October the government was on track to meet its fiscal targets.
Downing Street insists that when the chancellor addressed the nation over their Cheerios, she was not misleading the voters. “The idea that there was deception involved is completely, categorically wrong. At that time, everyone was operating on the basis that ‘two up, two down’ was the favoured option,” a source said. “There was then a moment when those people involved said: ‘Let’s just look at this from first principles. A manifesto breach is a major thing. Are there other ways of doing this?’”
In her pre-budget speech, Reeves warned that the UK’s productivity was weaker “than previously thought” and that “we will all have to contribute” to fill the hole in the public finances. She blamed the downgrade on the policies of the previous government.
She omitted to mention that the OBR had also predicted the productivity downgrade would be balanced out by higher wages increasing the government’s tax revenues. That meant she was on track to meet both her fiscal rules. She told the truth but not the whole truth.
The Treasury points out that, even with the better-than-expected forecasts from the OBR that arrived on 31 October, Reeves still had a £24bn hole to fill. This was not, however, because of changes in the figures but because of decisions that she had either made or had been forced on her by Labour MPs.
She wanted to increase the fiscal headroom and she needed to pay for a rise in welfare spending. Plus, scrapping the two-child benefit cap would cost an extra £3bn, as a result of the rebellion in Labour’s ranks. As Haldane put it: “The black holes have eaten themselves.”
Paul Johnson, the provost of Queen’s College, Oxford, and senior adviser at Frontier Economics, believes the chancellor did mislead the public. The Downing Street speech was “designed to tell a story that poor economic performance was behind the need to increase taxes, whereas what was actually behind the need to increase taxes was policy decisions”, he said.
He added: “And the claim that they had changed their view on whether to increase income tax rates because of the downgrade was clearly just untrue. They changed their minds for political reasons.”
He thinks the budget was a missed opportunity. “We saw no sense of direction at all from the chancellor. She’s not fixed anything because the OBR said she has still only got basically a coin-toss chance of meeting her fiscal rules. There was no real reform to council tax. There was no reform to the taxation of capital… This was not a budget focused on growth.”
Ministers were also disappointed by the lack of ambition. One said there was “no reforming zeal” and “no big argument” in what should have been a gamechanging budget. It had “saved political skin but did nothing that will endure for the country”. The prime minister and the chancellor had bought a little time with backbenchers “but not much”.
The fallout continues to resonate. Relations between the Treasury and the OBR were poor even before the forecaster inadvertently put the entire budget online an hour before the chancellor got to her feet. The latest intervention has taken them to rock bottom.
One of the chancellor’s allies described the budget process, which involves the OBR producing five forecasts in the two months running up to the budget, as “barmy”. A cabinet minister said: “What are we doing subcontracting all this to an external institution ? We can’t keep going with this crazy system.”
On Tuesday, OBR chair Hughes will have the chance to hit back when he gives evidence to the Commons Treasury select committee.
Reeves and Starmer went into the budget fighting for their political lives but a speech that was supposed to relieve the pressure on the prime minister and chancellor might in fact have increased it.
An Opinium poll for The Observer found that only 15% of voters thought this was a good budget and just 11% think it will have a positive effect on their personal finances, compared with 48% who think it will have a negative effect. There was strong opposition to abolishing the two-child benefit cap and freezing income tax thresholds, but the freeze in rail prices, cut in energy bills and council tax surcharge all polled well.
One Labour grandee said the MPs’ cheers in the Commons chamber “would turn to jeers” when they came into contact with the electorate back in their constituencies. “This was a placatory budget, not a reforming budget,” he said. “In some ways, the budget throws the leadership question into even starker relief; it’s all tacticalism, transactionalism, no overall plan or purpose other than survival. Nothing is inevitable but it seems to me that, rather than cementing Keir’s position, actually, the budget will weaken it.”
After the mayhem of the past few weeks, even previously loyal cabinet ministers are beginning to take seriously the idea that Starmer may not survive.
How it all unfolded
7 August
The Office for Budget Responsibility (OBR) sent a confidential note to the Treasury indicating it was lowering its forecast for productivity growth by 0.3%. According to the letter sent by the financial watchdog’s chair, Richard Hughes, inset right, to the Treasury select committee last week, the OBR “did not revisit that 0.3 percentage point reduction at any subsequent point” in the run-up to the budget.
“A dam has burst,” one said. “Keir is like the tech guy turning up trying to fix the computer, but the prime minister should be more like the architect creating a blueprint for the country. People want to be led.”
17 September
The OBR sent its round one economic forecasts to the Treasury. Hughes’s letter made clear that it “included increases in real wages and inflation which offset the impact of the productivity downgrade”.
15 October
The Financial Times reported that “Reeves confirmed that the independent Office for Budget Responsibility had downgraded its forecasts for UK productivity growth.” There was no mention that other changes had offset them.
20 October
In a new forecast, the OBR told the Treasury the productivity downgrade had been wiped out. It was now forecasting the government to be in the black to the tune of £2.1bn by 2029-30.
27 October
Faisal Islam, BBC economics editor, wrote that the government was facing a bigger-than-expected hole in the public finances as it prepared for the budget.
31 October|
The OBR told the chancellor the productivity downgrade had been more than offset by other changes so “both of the government’s fiscal targets were on course to be met with headroom of £4.2bn for the current balance”.
4 November
In an unusual breakfast-time speech, three weeks before the budget, Reeves, inset above, said: “We face global uncertainty, rising debt costs and pressures on productivity. These challenges cannot be ignored. If we are to build the future of Britain together, we will all have to contribute to that effort.” This was widely interpreted as laying the ground for tax rises.
Photograph by Leon Neal/Getty Images. Other picture by Jason Alden/Bloomberg via Getty Images