Britain's Chancellor of the Exchequer Rachel Reeves takes journalists' questions after delivering a speech in the media briefing room of 9 Downing Street, central London, on November 4, 2025, ahead of the forthcoming Budget. JUSTIN TALLIS/Pool via REUTERS
Britain's Chancellor of the Exchequer Rachel Reeves delivers a speech in the media briefing room of 9 Downing Street, central London, on November 4, 2025, ahead of the forthcoming Budget. JUSTIN TALLIS/Pool via REUTERS
Britain's Chancellor of the Exchequer Rachel Reeves takes journalists' questions after delivering a speech in the media briefing room of 9 Downing Street, central London, on November 4, 2025, ahead of the forthcoming Budget. JUSTIN TALLIS/Pool via REUTERS
Britain's Chancellor of the Exchequer Rachel Reeves arrives to deliver a speech in the media briefing room of 9 Downing Street, central London, on November 4, 2025, ahead of the forthcoming Budget. JUSTIN TALLIS/Pool via REUTERS

By Alistair Smout and Sarah Young

LONDON (Reuters) -British finance minister Rachel Reeves paved the way for broad tax rises to avoid a return to "austerity" on Tuesday, framing her second annual budget as one of "hard choices" to protect public spending while reducing Britain's debt.

Just three weeks before delivering the budget, Reeves set out the difficult economic backdrop she is wrestling with, pointing to a surge in debt due to the COVID-19 pandemic, years of low productivity and stubborn inflation.

That suggested she could make the politically unpalatable choice to break the Labour Party's election pledge not to raise any of the major taxes, to try to reassure investors she is keeping a firm grip on borrowing.

British government borrowing costs are the highest of any major advanced economy, though they have been falling in recent weeks. Reeves' comment that "we will all have to contribute" helped 30-year gilt yields - which hit their highest since 1998 in September - drop to their lowest since April.

EASY ANSWERS ARE 'IRRESPONSIBLE'

Reeves said she remained committed to her goal of balancing the government budget by 2029/30, excluding investment spending.

"As I take my decisions on both tax and spend, I will do what is necessary to protect families from high inflation and interest rates ... to protect our public services from a return to austerity," she told a news conference.

She said she would not follow her predecessors and look for "short-term sticking plaster solutions", saying anyone who advocated that was being "irresponsible".

Her words, which firmly put the blame for the state of the economy on previous Conservative administrations, suggested the Labour government could break its pledge and raise one of the key taxes -- income tax, value-added tax or social security contributions.

The Resolution Foundation think tank - whose former head Torsten Bell is now a minister advising Reeves - predicts she will need to increase taxes by 26 billion pounds ($35 billion).

One Labour lawmaker, who did not wish to be named, said the parliamentary party was split over the probable tax rises, with some fearing how damaging a broken election pledge would be to the party.

But the lawmaker said others were aware of the need to fix the public finances, so they do not get caught in the same cycle of needing to increase taxes again, saying: "A lot just don’t realise how bad it’s going to be."

Reeves declined to directly answer questions on whether she was readying Britain for tax rises, but said the economic backdrop had deteriorated since her first budget, in October last year, when she raised taxes by 40 billion pounds - the largest increase since the 1990s.

The burden fell mostly on businesses and Reeves said at the time the increases were meant to be a one-off.

Conservative Party leader Kemi Badenoch described Reeves' speech as a "laundry list of excuses" and said any higher taxes would be the fault of Labour's decisions since it came into office in July 2024.

Richard Tice, deputy leader of poll frontrunner Reform UK, said the government's plans would "hammer working people", a day after the populist party struck a more pragmatic tone with its own fiscal plans.

INCREASING THE FISCAL BUFFER

Reeves also again indicated she wanted to create headroom between tax receipts and spending commitments.

Economists believe Reeves has lost all of the 9.9 billion pounds she gave herself against meeting her target of bringing day-to-day spending into balance with tax revenue by 2029.

Tax rises would be needed to rebuild that buffer. Reeves, however, said if she got her decisions right, she would build "more resilient public finances with the headroom to withstand global turbulence, giving business the confidence to invest".

While she would not copy a former Conservative government by bringing in "austerity" by cutting public services, Reeves said she wanted to reduce government debt.

Matthew Amis, investment director for rates management at fund manager Aberdeen Investments, said Reeves' speech "provided the gilt market with all the right comforting words".

But he said British government bond prices had lost their initial gains as Reeves was not explicit on how she would raise revenue or control spending.

"UK chancellors have talked tough in the past, only to then fail on delivery or U-turn at the last moment," he said.

Some business leaders also said further tax rises would slow growth.

"Last year's budget has left scar tissue with all of us. Consumer sentiment dropped significantly after last year's budget, I hope it doesn't do so again," George Weston, chief executive of Primark-owner Associated British Foods, told Reuters.

(Writing by Elizabeth Piper and David Milliken; additional reporting by Sam Tabahriti, Sarah Young, Suban Abdulla and James Davey, editing by Kate Holton and Susan Fenton)