Chancellor Rachel Reeves is at the centre of a Labour Party storm as she grapples with difficult budget decisions, with internal divisions mounting over whether to raise taxes or slash spending to balance the books.
Reeves faces intense pressure from multiple factions within her party, particularly as Prime Minister Sir Keir Starmer has committed to increasing defence spending while also pledging not to return to austerity. This has placed the Chancellor in what one party source described as “an impossible choice.”
Departments have been instructed to identify savings of up to 11%, but with the NHS likely to be shielded from cuts—despite accounting for over 40% of public service spending—other sectors such as policing and local government face the prospect of severe reductions, told Daily Express.
Some ministers have urged Reeves to consider further tax increases instead of deep spending cuts. However, this too presents significant challenges. “If we are talking about more taxes, who are we going to tax now?” a Labour insider questioned. “You can’t just keep asking the same people for more money.”
Labour’s manifesto promised not to increase taxes on “working people,” and Reeves previously pledged that she was “not coming back with more borrowing or more taxes.” However, last year’s budget already introduced tax hikes, including a rise in employer National Insurance contributions, making further increases politically risky.
At the same time, Labour faces growing calls to accelerate its planned increase in defence spending to 2.5% of GDP—costing nearly £5 billion—or even go further in response to rising global threats. Labour MPs Laura Kyrke-Smith and Melanie Ward pointed out that Poland is set to allocate 4.7% of its GDP to defence. In a joint article, they warned: “Planning to reach 2.5% of GDP spending on defence at a distant future moment is no longer sufficient. We must move fast and be far more ambitious, as Finland, Sweden and others already are.”
Meanwhile, Reeves is also expected to target the UK’s soaring benefits bill, a move likely to spark further rebellion from backbench Labour MPs. Incapacity and disability benefits currently cost £64.7 billion annually, with the Office for Budget Responsibility warning that figure could climb to £100.7 billion by 2030.
Work and Pensions Secretary Liz Kendall is reportedly pushing for any savings from benefits cuts to be reinvested in employment-boosting programs. However, any such move is likely to face fierce opposition within Labour ranks, leaving Reeves with no easy path forward.
