Food prices will increase despite the government’s drive to reduce the cost of living, retailers have warned, as Chancellor Rachel Reeves prepares to give her make-or-break Budget on Wednesday.
The Chancellor is also expected to allow mayors to introduce tourist taxes – making the cost of staying in hotels and Airbnbs more expensive – but will hike the minimum wage and end the two-child benefit cap.
And, on the eve of the Budget on Tuesday, the Government announced that milk shakes and some packaged coffees would be included in the “sugar tax”, adding more to a weekly shop.
The measures come as Rachel Reeves will opt for a “smorgasbord” of taxation instead of a manifesto-busting income tax hike as she seeks to raise enough money to fill a projected £20-£30bn gap in the UK’s finances.
She will also seek to increase her headroom against her fiscal rules that day-to-day spending should be met by taxation by 2029 to around £15bn from £9.9bn.
Reeves insisted she was taking the “fair and necessary choices to deliver on our promise of change”.
In words released on Tuesday night, she said: “I will not return Britain back to austerity, nor will I lose control of public spending with reckless borrowing,” she said.
“I will take action to help families with the cost of living…cut hospital waiting lists…cut the national debt.
“And I will push ahead with the biggest drive for growth in a generation.
“Investment in roads, rail and energy. Investment in housing, security and defence. Investment in education, skills and training.
“So together, we can build a fairer, stronger, and more secure Britain.”
The relatively low headroom after last year’s Budget has dogged the Chancellor after increases in borrowing costs wiped it out.
The Budget is also expected to see the Chancellor freeze tax thresholds – a so-called stealth tax that will drag millions into higher tax brackets, but raise around £7.5bn.
Reeves will face her defining moment as Chancellor when she stands up on Wednesday at about 12.30pm – with her own future and that of the government at stake after a year in power, which has seen the economy flatline as the growth promised by Labour remains elusive and inflation remains stubbornly high.
She is likely to claim that on top of inheriting a poor economy from the Tories, which had a shortfall of £22bn more than expected, the Brexit trade deal and Trump tariffs have knocked Labour’s plans off course.
Food costs warning
One of her tax-raising measures is expected to be an increase to business rates, with supermarkets failing to secure an exemption despite warnings that the costs will be passed on to consumers.
Last month, the bosses of the UK’s nine biggest supermarket chains wrote to the Chancellor, warning that the higher rate would fuel inflation.
“If the industry faces higher taxes in the coming budget – such as being included in the new tax on business rates – our ability to deliver value for our customers will become even more challenging and it will be households who inevitably feel the impact”, the chiefs of Tesco, Sainsbury’s, Asda, Aldi, Morrisons, Lidl, M&S, Waitrose and Iceland said.
Helen Dickinson, Chief Executive at the BRC, said: “Retail is 5 per cent of the economy but pays over 20 per cent of all business rates.
“The Chancellor promised that these reforms would rebalance business rates across the economy to support our high streets.
“If she chooses to land large retailers with an even bigger burden, now and in the future, it will be our high streets that suffer, with fewer jobs, less investment, and higher prices for customers.”
A retail industry source said: “Business rates aren’t levied on the goods you sell; they affect your bottom line. So any increase in rates is likely to have a broad impact on prices, rather than on specific goods.”
They added: “Those most affected are those with bigger, or more centrally located premises. So big city centre stores, or big supermarkets, are likely to be dragged into the surtax.”
Sugar tax extended
On Tuesday, Health Secretary Wes Streeting confirmed that the Government would bring milk drinks within the scope of the sugar tax, scrapping an exemption which has existed since the tax was introduced on soft drinks in 2018.
He also announced that the sugar content threshold at which the tax applies would be lowered from 5g to 4.5g of sugar per 100ml.
It will mean that some milk-based drinks will get more expensive when the change comes into effect on 1 January 2028, unless producers reduce their sugar content.
Streeting told MPs that the policy would combat childhood obesity. “This Government will not look away as children get unhealthier,” he said.
The British Soft Drinks Association said that the decision would “create an additional cost burden for industry”, although the membership body said it took “comfort from the fact that a Government which describes itself as pro-growth has elected not to pursue its original goal of lowering the threshold to 4g per 100ml, which would have been technically challenging for industry.”
Tourist tax ‘will cost public £518m’
The Government will also give mayors in England’s cities and regions the power to impose a “modest” charge on visitors staying in hotels and holiday lets.
The “tourist tax” had been called for by Labour mayors such as London’s Sir Sadiq Khan and Greater Manchester’s Andy Burnham, who welcomed the announcement.
Steve Reed, the Local Government Secretary, said: “We’re giving our mayors powers to harness this and put more money into local priorities, so they can keep driving growth and investing in these communities for years to come.”
However, Kate Nicholls, the chair of UKHospitality, said it could cost the public up to £518m. “Make no mistake – this cost will be passed directly on to consumers, drive inflation and undermine the Government’s aim to reduce the cost of living,” she said.
Lord Houchen, the Conservative Tees Valley mayor, ruled out using the levy. “There will be no tourist tax in Teesside, Darlington and Hartlepool for as long as I’m Mayor,” he said. “Thanks, but no thanks.”
Separately, the Government is understood to have dropped plans to remove VAT from energy bills, although other measures are expected in the Budget to tackle energy prices, such as removing some social and environmental levies from bills.
The levies – which pay for things like energy improvement schemes in homes – will be funded from general taxation instead.
As The i Paper first reported in July, the Chancellor is expected to freeze fuel duty again, while the National Living Wage will rise from £12.21 to £12.71 per hour.
Focus on cost of living
Asked whether Starmer was concerned about whether the tax increases would drive up prices, the Prime Minister’s Official Spokesman said: “You’ve heard from the Prime Minister in the last few days about his focus on the cost of living, and that is a major focus, both for him and the government.
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“More broadly, you’re seeing that through things like the freezing of rail fares, the increasing of the state pension, freezing of prescription charges for millions, and expanding free breakfast clubs. So cost of living is a core focus for this government, as you see in the measures that I’ve just outlined.”
On the extension of the sugar tax, he said: “This is a levy on manufacturers and importers, which, since its introduction has not led to the tax being passed on to consumers.
“It has seen sugar content almost halved in the products currently in scope and extending the levy in this way with further reformulation of products to help people.”
