Labour’s budget is a “terrible illusion” that will hit working people, threaten higher mortgages and risk spooking the city.

Sir Keir Starmer will today (MON) promise “better days are ahead” and insist his long-term plans will put more money in people’s pockets.

But ex-Bank of England governor Mervyn King poured scorn on the Prime Minister’s claims that so-called working people will escape rising taxes.

He said: “All this debate about not putting up taxes on working people is a terrible illusion, really.

“Taxes are paid by people, they’re not paid by companies or institutions, ultimately, they fall on the amount that people can spend, and you only can raise significant amounts of money by raising taxes on most people, however you care to define that, but it’s most people will have to pay higher taxes.

“And if they, instead of unwinding the cuts in employees’ national insurance contributions, put up employers’ national insurance contributions, that will make it less likely that companies will exceed to wage demands, they will press down on that, they will probably be less enthusiastic about creating new jobs.

“Ultimately, the impact of these higher taxes has to be on the consumption of most people, however you care to define that group.”

Lord King said Labour’s decision to box itself in by promising it would not increase national insurance, VAT and income tax was “very unwise”.

He told Sky News it was “possible” that changes to debt rules to free up cash for investment would push up mortgage rates in the long term.

City analysts reportedly have concerns that the markets “beat up” on the weakest link among advanced economies and warned that after a rise in borrowing costs last week, Ms Reeves “is playing with fire, because if they want to bet against the UK, she is in big trouble”.

After weeks of pressure to define what their promise not to increase taxes on “working people” means, the government faced fresh embarrassment over its budget after a “total cock-up with the comms” over another announcement.

Downing Street announced on Friday that the Chancellor would announce five new freeports in the Budget, but yesterday it emerged that would not now happen.

The Chancellor will instead confirm funding for “next steps” for five of the existing sites, which will receive official clearance to have custom zones within their boundaries.

Ms Reeves will also approve plans for a separate “investment zone” in the East Midlands that were put forward by the previous Tory government.

Government sources said the error had arisen over the distinction between customs sites and freeports.

The Chancellor is planning to announce a cut to the earnings threshold at which employers pay national insurance and an increase in the rate of contributions.

Capital gains tax, inheritance tax and fuel duty are also expected to be in her sights.

Meanwhile, the £2 cap on bus fares introduced by the Conservatives will be lifted to save cash.

New research from the Jobs Foundation found that almost all of the Government’s fiscal black hole could be plugged by meeting Labour’s target to increase the employment rate to 80 per cent.

Co-founder Lord Elliott said: “The Government’s aspiration to take two million people from welfare into work is to be commended, and achieving this would raise an additional £20 billion for the Exchequer, but it also requires businesses to have the right conditions to thrive, and I hope this is at the forefront of the Government’s mind as they put the finishing touches to their first Budget.”

Sir Keir insisted the government’s first Budget will fix the foundations as he promised to reject austerity.

In a speech today (MON), the Prime Minister will deny the state is bloated and admit that he cannot replicate Labour’s most successful premier, Sir Tony Blair.

He will say: “We have to be realistic about where we are as a country. This is not 1997, when the economy was decent but public services were on their knees. And it’s not 2010, where public services were strong, but the public finances were weak. These are unprecedented circumstances.”

The PM will it is time to run “towards the tough decisions” and ignore the “populist chorus of easy answers”.

He will add: “If people want to criticise the path we choose, that’s their prerogative. But let them then spell out a different direction.

“If they think the state has grown too big, let them tell working people which public services they would cut. If they don’t see our long-term investment in infrastructure as necessary, let them explain to working people how they would grow the economy for them.”