Rachel Reeves has declared her budget will slash living costs for millions including ending the two-child benefit limit and cutting energy bills, but taxes are set to soar by £26bn to plug a gaping shortfall in the public finances.

Major measures in the budget leaked early in a shock accidental release by the Office for Budget Responsibility (OBR), triggering an instant bond market reaction an hour before the chancellor was on her feet in the House of Commons. After months of speculation, Reeves said her measures would put the public finances on a sustainable path while building “a fairer, a stronger, a more secure Britain” by tackling inflation and investing in large infrastructure projects.

She also built herself a larger £22bn of headroom – to stave off future cycles of pre-budget speculation that she will miss her fiscal rules and to bring down borrowing costs.

“I said I would cut the cost of living and I meant it. This budget will bring down inflation and provide immediate relief for families,” she said.

But faced with a multibillion-pound shortfall in the government finances, the chancellor said she was “asking everyone to make a contribution” as she announced sweeping tax increases on incomes, pensions and property.

Reeves confirmed Labour would remove the two-child limit on benefits, in a measure designed to settle restless backbenchers heaping pressure on Keir Starmer’s government.

“We are lifting 450,000 children out of poverty with the end of the two-child limit. And combined with other actions we are taking, this Labour government is achieving the biggest reduction in child poverty over a parliament since records began,” she said.

Reeves said it had been a personal mission to reduce child poverty as she lifted the cap in full, despite speculation she could favour a tapered rate. “I don’t intend to preside over a status quo that punishes children for the circumstance of their birth,” she said.

“Neither can I in good conscience leave in place the vile policy known as the rape clause, requiring women to prove if their child has been conceived non-consensually to receive supports. I’m 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 grotesque indignity of women.”

In a budget under scrutiny from jittery MPs and bond investors, Reeves placed a massive £15bn increase in personal taxes at the centre of her revenue-raising efforts – centred on a longer-than-anticipated three-year freeze in tax thresholds.

One in four workers will be paying the higher income tax rate by 2030 because of that freeze, which opposition parties described as a war on the middle class.

Reeves admitted that the move would raise taxes on working people – which she had promised not to do. “To break the cycle of austerity, we need a fair and a sustainable tax system, one that generates revenues to fund the public services that we all use, and supports investments to grow our economy. That does mean that today I am asking everyone to make a contribution,” she 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; alongside gambling taxes, a new mileage-based charge on electric vehicles, and the introduction of a high-value council tax surcharge in England, which has been called a “mansion tax”.

Taken together, the OBR said her measures helped to overturn a £4bn projected shortfall against the chancellor’s self-imposed fiscal rules to rebuild headroom worth £22bn – significantly above expectations.

In the spring, Reeves left £9.9bn in reserve as a buffer. However, the independent Treasury watchdog said this had been more than erased by a sharp cut in its forecasts for productivity growth, elevated borrowing costs and U-turns on welfare changes dropped earlier this year.

The chancellor said she had pushed to keep the tax contribution to rebuild the government finances as limited as possible, while attempting to ease living costs for households. Announcing measures to cut energy bills, she said the overall package would reduce headline inflation by 0.3 percentage points next year.

Taking action to ease the pressure on families, Reeves said she would take £150 off energy bills by removing green levies and freezing rail fares, fuel duty and prescription fees.

Inflation is running at 3.6% at present – significantly above the government’s 2% target, and the highest reading in the G7.

However, while her actions reduce government borrowing – from 4.5% of GDP this year to 1.9% in 2030-31 – the OBR predicted growth would be weaker than anticipated in 2026, with a sharp downgrade from 1.9% to 1.4%.

Reeves said she intended to prove those forecasts wrong. “We beat the forecasts this year, and we will beat them again,” she said. “By boosting trade, not blocking it. By increasing investment. Not cutting it. By championing innovation, not stifling it by backing working people, not making them poorer.”

In response to the dramatic early release of the OBR’s critical assessment, Reeves said it was a “deeply disappointing and a serious error on their part” for which the watchdog had taken full responsibility.

Labelling the release “utterly outrageous” after months of kite-flying, Mel Stride, the shadow chancellor, said: “This leak may constitute a criminal act.”

The OBR apologised and said it had launched an investigation after its economic and fiscal outlook document was published early before the budget, describing it as a “technical error”. Usually, the OBR publishes its outlook after the chancellor’s speech has finished.

The surprise early release sent government bond yields down, as investors were cheered by the apparent increase in headroom.