Rachel Reeves set to break Labour tax pledge and scrap two-child benefit cap

During her fiscal statement last year, the Chancellor reiterated the party's election promise not to raise national insurance, VAT, or income tax on "working people".

But Ms Reeves has now admitted the world has changed since then, and sticking to these principles would mean “deep cuts” to public investment, which could derail hopes of future economic growth.

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She told BBC Radio 5 Live: "We’ve always got choices to make, and what I promised during the election campaign was to bring stability back to our economy, and what I can promise now is I will always do what I think is right for our country."

The Chancellor also signalled her intention to lift the two-child benefit cap in the Budget on November 26, saying there were “costs to our economy in allowing child poverty to go unchecked”.

Explaining her U-turn, Ms Reeves blamed instability around the world, fuelled by Donald Trump’s tariffs and the war in Ukraine, along with an unexpected downgrade in economic growth forecasts from the Budget watchdog.

She also criticised the previous Conservative government for the poor national productivity and growth seen over the last few years, claiming they were "always taking the easy option to cut investment in rail and road projects, in energy projects and digital infrastructure".

The Chancellor added: “We’re still going through the process at the moment of preparing the Budget measures.

"So those final decisions haven’t been taken yet, but as I take those measures, I will do what I believe is right for our country, and sometimes that means not always making the easy decisions, but the decisions that I think are in our national interest."

Sir Keir Starmer’s landslide election win was built on a promise not to increase income tax, employees’ national insurance or VAT.

But Ms Reeves looks set to break that pledge, adding that the forecasts for economic growth would be downgraded because of the Office for Budget Responsibility’s revisions of the UK’s productivity.

“They’ll be very clear this is based on our productivity performance of the last few years under the last government, but they’re using it to make projections about productivity in the future, and that does mean lower growth, and we have to accommodate that, because we have to live within our means," she said.

The two-child benefit cap, which means a family can only claim benefits for the first two children, has not been touched by the Government so far.

The policy has split the Labour party, with seven of its MPs suspended for voting to scrap it, while others are aware it will cost £2.8bn to do so.

Pushed on whether she would lift the cap, Ms Reeves said: "I don't think that it's right that a child is penalised because they are in a bigger family, through no fault of their own. So we will take action on child poverty."

Ms Reeves also acknowledged her decision to hike taxes in her first budget, including an increase in employers’ national insurance contributions, had also had an impact on growth.

She said: "I recognise that those decisions to increase taxes in the budget last year would have an impact on business and on the wealthiest whose taxes we increased.

"What I would say is doing nothing wasn’t an option."

Labour’s deputy leader Lucy Powell warned that breaking the pledge not to raise income tax, national insurance or VAT would damage “trust in politics” and “we should be following through on our manifesto, of course”.

Shadow chancellor Sir Mel Stride said: “Rachel Reeves is trying to pull the wool over your eyes. Having already raised taxes by £40 billion she said she had wiped the slate clean, she wouldn’t be coming back for more and it was now on her.

"Every time the numbers don’t add up, Reeves blames someone else. But this is about choices – and the Chancellor is making all the wrong choices."