Keir Starmer warns the UK budget this week will reflect 'harsh' economic reality

LONDON — (AP) — Fixing Britain's troubled economy will be a long haul in a "harsh" fiscal environment, Prime Minister Keir Starmer said Monday, setting the stage for his government's high-stakes first budget this week.

Starmer hopes voters will accept his argument that higher taxes and limited public spending increases are needed to “fix the foundations” of an economy that he says has been undermined by 14 years of Conservative government. But his message — things will slowly get better — is a risky one in a high-speed political world.

“It’s time to embrace the harsh light of fiscal reality,” Starmer said, telling voters that politicians must “stop insulting your intelligence with the chicanery of easy answers.”

“I will never stand here and tell you to feel better, if you don’t,” he added during a speech in the central England city of Birmingham two days before Wednesday's budget. “Change must be felt.”

Starmer's center-left Labour Party was elected July 4 after promising to banish years of turmoil and scandal under Conservative governments, get Britain's economy growing and restore frayed public services, especially the state-funded National Health Service.

Pumping money into health, education and other services is made harder by a sluggish economy, hobbled by rising public debt and low growth of just 0.2% in August. Starmer also says that on taking office he discovered a 22 billion pound ($29 billion) “black hole” in the public finances left by the Conservative government.

The Conservatives say they left an economy that was growing, albeit modestly, with lower levels of debt and a smaller deficit than many other Group of Seven wealthy nations.

Paul Johnson, head of independent think-tank the Institute for Fiscal Studies, said the budget hole is real, but that both Labour and the Conservatives were dishonest about the economy during the election.

“It was obvious that they were either going to have to cut spending, which is what the previous government said they were planning to do, or increase taxes,” he told Sky News. “But of course, no party was willing to say that. That’s why we called it a conspiracy of silence at the time.”

That means the budget is certain to include tax increases – though Labour has pledged not to raise the tax burden on “working people,” a term whose definition has been hotly debated in the media for weeks.

Treasury chief Rachel Reeves – Britain's first female chancellor of the exchequer -- is widely expected to tweak the government's debt rules so that she can borrow billions more for investment in the health system, schools, railways and other big infrastructure projects, and to raise money by hiking tax paid by employers, though not employees. She could also raise taxes on capital gains, arguing they do not form part of the main income of working people.

Starmer said that “tax rises will prevent austerity and rebuild public services,” while “borrowing will drive long-term growth.”

“There are no shortcuts,” he said.

Starmer's government set out its tough-medicine approach to the economy soon after being elected. One of its first acts was to strip millions of retirees of a payment intended to help heat their homes in winter. It was intended to signal determination to take difficult decisions, but spawned a sharp backlash from Labour members and sections of the public.

It also sat awkwardly with news that Starmer had accepted thousands of pounds' (dollars') worth of gifts including clothes, designer eyeglasses and tickets to see Taylor Swift. After days of negative headlines, he agreed to pay back 6,000 pounds (almost $8,000) worth of freebies.

Headlines about internal Labour feuds and “Swiftgate” flourished during the long wait for the budget, which is being delivered almost four months after the election, an unusually big gap.

Labour “has been finding the adjustment into government a bit hard,” said Jill Rutter, a senior fellow at the Institute for Government think-tank. “There has been a sense that everybody is just in a holding pattern until we get the budget.”

Starmer is a famously cautious politician, and Reeves, a former Bank of England economist, wants to be seen as a prudent guardian of the nation's purse strings. Rutter said that part of the reason for the slow buildup to the budget is the memory of the economic turmoil unleashed by then-Prime Minister Liz Truss in October 2022. Truss resigned as prime minister after just 49 days in office when her plan for billions in tax cuts rocked the financial markets and battered the value of the pound.

“Every chancellor is now scarred by the ghost of Liz Truss past,” Rutter said, noting that Reeves “clearly didn’t want to do a Liz Truss and do a rushed job.

“The question is, does she do a good enough job on Wednesday that people think that she’s used that time well?” Rutter added. “The stakes are quite high for the government.”

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