Rachel Reeves says budget will cut living costs after shock OBR leak | Budget 2025

Rachel Reeves has announced her budget will cut living costs for millions, including ending the two-child allowance cap and cutting energy bills, but taxes are expected to rise by as much as £26bn to plug the huge gap in the public finances.

Key measures in the budget were leaked early in a shocking accidental announcement from the Office for Budget Responsibility (OBR), triggering an immediate reaction in the bond market an hour before the chancellor stood up in the House of Commons. After months of speculation, Reeves said his measures would put public finances on a sustainable path, while also building a “fairer, stronger, safer Britain” by tackling inflation and investing in major infrastructure projects.

It has also built itself a larger £22bn headroom to fend off future cycles of pre-budget speculation that it will miss fiscal rules and reduce borrowing costs.

“I said I would reduce the cost of living, and I meant it. This budget will reduce inflation and provide emergency aid to families,” he said.

But facing a multibillion-pound deficit in government finances, the chancellor said he was “asking everyone to contribute” as he announced sweeping tax rises on incomes, pensions and property.

Reeves confirmed Labor would scrap the two-child limit on benefits as a measure designed to appease restive bigots who are putting pressure on Keir Starmer’s government.

“With the end of the two-child limit, we are lifting 450,000 children out of poverty. And together with the other actions we have taken, this Labor government is delivering the biggest parliamentary reduction in child poverty since records began,” he said.

Despite speculation that he might support a reduced rate, Reeves has said it is a personal mission to reduce child poverty while eliminating the cap altogether. “I do not intend to preside over a status quo that punishes children based on their birth,” he said.

“I also cannot in good conscience abandon the despicable policy known as the rape clause, which requires women to prove that their children have been conceived against their will in order to receive support. I am proud to be Britain’s first female chancellor of the exchequer. I take the responsibilities that come with that seriously. I will not tolerate the outlandish humiliation of women.”

Reeves has put a massive £15bn increase in personal taxes at the center of revenue-raising efforts in a budget under scrutiny from nervous MPs and bond investors; focused on a three-year freeze on tax thresholds that lasted longer than expected.

One in four workers will pay higher income taxes by 2030 due to this freeze, which opposition parties describe as a war against the middle class.

Reeves admitted that the move would increase taxes on working people; He promised he wouldn’t do that. “To break the cycle of austerity, we need a fair and sustainable tax system that generates revenue to fund the public services we all use and supports investments that will grow our economy. That means I’m asking everyone to contribute today,” he said.

As part of dozens of other revenue-raising measures, the chancellor announced a £2,000 cap on the exemption of salary sacrificed pension contributions from 2029; as well as gambling taxes, a new mileage-based charge on electric vehicles and the introduction of a high-value council tax surcharge, called the “mansion tax” in the UK.

Taken together, the OBR said its measures had helped reverse a projected £4bn deficit against the Chancellor’s self-imposed fiscal rules to rebuild £22bn worth of headroom; This is well above expectations.

In the spring, Reeves left £9.9bn in reserve. But the independent Treasury watchdog said this had been largely erased by a sharp fall in productivity growth forecasts, rising borrowing costs and U-turns on welfare changes earlier this year.

The chancellor said he was trying to keep the tax contribution as limited as possible to rebuild the government’s finances while trying to ease the cost of living for households. Announcing measures to reduce energy bills, he said the overall package would reduce headline inflation by 0.3 percentage points next year.

Acting to ease pressure on families, Reeves said he would cut energy bills by £150 by scrapping green taxes and freezing rail charges, fuel duty and prescription charges.

Inflation is currently running at 3.6 percent; This figure is well above the government’s 2 percent target and the highest in the G7.

However, while its actions have reduced government borrowing (from 4.5% of GDP this year to 1.9% in 2030-31), the OBR has predicted growth will be weaker than expected in 2026, with a sharp decline from 1.9% to 1.4%.

Reeves said he aims to prove these predictions wrong. “We beat the forecast this year and we will beat it again,” he said. “By encouraging trade, without hindering it. By increasing investment. Without cutting it. By supporting innovation, without stifling it. By supporting working people, without making them poorer.”

In response to the dramatically premature publication of the OBR’s critical assessment, Reeves said it was “deeply disappointing and a serious error for which observers take full responsibility”.

Shadow chancellor Mel Stride, who labeled the statement “utterly outrageous” after months of kite-flying, said: “This leak could constitute a criminal offence.”

The OBR apologized and said it had launched an investigation after the economic and fiscal outlook paper was published ahead of the budget, describing it as a “technical error”. The OBR usually publishes its outlook after the chancellor’s speech has finished.

The surprise early announcement caused government bond yields to fall as investors rejoiced at the apparent increase in vacancy.