Britain is preparing for another round of tax rises as Chancellor Rachel Reeves warns that the UK’s economic inheritance is worse than expected.
In a speech at Downing Street on Tuesday morning, Reeves said that years of austerity, Brexit disruption, and pandemic-related spending have weakened the country’s fiscal position.
She emphasised the need to keep debt under control, bring inflation down, and maintain market confidence, even if that requires difficult decisions in the months ahead.
The chancellor’s comments signal that Labour’s fiscal strategy will prioritise credibility and restraint over rapid expansion.
Reeves made clear that her goal is to stabilise public finances and pave the way for sustainable growth, rather than rely on short-term stimulus or excessive borrowing.
The Budget this month will focus squarely on the priorities of the British people: cutting waiting lists, cutting the national debt and cutting the cost of living.
Today I will set out the choices our country faces and the values that will guide my decisions.
Fiscal realism replaces optimism
Reeves has already raised around £40 billion ($52 billion) in taxes in last year’s budget, a move she previously described as a one-off measure to restore stability after the turbulence of the previous administration.
However, she said on Tuesday that the financial damage inherited from previous governments was deeper than Treasury forecasts had suggested.
“Years of economic mismanagement have limited this country’s potential,” Reeves said in her televised address.
She pointed to the long-term effects of austerity, the uncertainty surrounding Brexit, and the pandemic’s costs as the main factors behind the UK’s sluggish productivity and higher debt burden.
Her statement sets a clear tone for the next budget.
Reeves reaffirmed her commitment to Labour’s “iron clad” fiscal rules, under which public debt must fall as a share of GDP and day-to-day spending must be funded by tax revenue rather than borrowing.
Some members of her party have argued that these limits should be relaxed to allow for more public investment.
Reeves dismissed that view, saying that “no accounting trick” can alter the fact that government debt is financed through financial markets that demand credibility.
Markets respond to fiscal discipline
The bond markets responded positively to Reeves’ remarks. Gilts rallied, with the 10-year yield falling four basis points to 4.40% and the 30-year yield reaching its lowest level since April.
Investors have been encouraged by the prospect of continued fiscal consolidation and by growing expectations that the Bank of England may cut interest rates later this week if inflation continues to fall.
The pound slipped 0.2% to $1.3109, reflecting both stronger demand for gilts and market adjustments to the chancellor’s cautious tone.
Experts said that Reeves’ focus on balancing inflation control with debt stability reassured investors that fiscal and monetary policy are now moving in alignment after years of disjointed decision-making.
Her statement also suggested that the government’s priority is to create conditions for lower borrowing costs by maintaining fiscal discipline, rather than attempting to stimulate growth through higher spending.
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