Rachel Reeves targeted Britain’s wealthiest households with a £26bn tax-raising budget to fund scrapping the two-child benefit policy and cutting energy bills.

On a chaotic day that involved key details of her budget accidentally being released early by the Office for Budget Responsibility (OBR), the chancellor defended the measures, saying she was “asking everyone to make a contribution to repair the public finances”, but that she wanted the wealthiest to pay the most.

While insisting she had avoided reckless borrowing and dangerous cuts, the budget will push the tax take to an all-time high of 38% of GDP in five years’ time.

More than 1.7 million workers will be dragged into either paying tax for the first time or pushed into a higher band by an additional three-year freeze on income tax and national insurance thresholds – that Reeves conceded would hit “working people” but bring in £12.4bn by 2030-31.

Some Labour MPs privately expressed alarm at the extent to which the budget would hit the so-called “squeezed middle” including more nurses, teachers and police officers paying the higher rate tax.

Almost one in four taxpayers, 24%, will be paying the higher or additional rates in five years’ time as a result of extending the threshold freeze, a process known as “fiscal drag”. The OBR said the threshold freeze would bring an additional 780,000 people into paying the basic rate of income tax; 920,000 into paying the higher rate; and another 4,000 would pay the additional rate.

In a series of well-trailed measures, the chancellor targeted the rich via a new council tax surcharge for properties worth more than £2m and announced a 2p tax increase on income from dividends, savings and property. Contributions to “salary sacrifice” pension schemes, on which employers pay no national insurance, will be capped at £2,000 from 2029 – bringing in a significant £4.7bn a year.

Reeves later told journalists that she did not believe she had broken the Labour manifesto with the threshold freeze. “If you read the manifesto, we are very clear, we say ‘the rates of income tax, NI and VAT’, but if you are asking does this have a cost for working people, I acknowledge it does,” she said.

The OBR said the tax squeeze would hit living standards, with real disposable household income scheduled to rise by just 0.25% a year over the forecast period – weaker than it expected in March.

Financial markets responded positively as Reeves more than doubled the financial buffer she has left against her fiscal rules to £21.7bn, from less than £10bn in her spring statement.

Yields on 10-year government bonds, or gilts, which move in the opposite direction to prices, were down 0.07 percentage points at 4.41% by late on Wednesday, lowering the cost of government borrowing.

Labour MPs hailed the chancellor’s decision to spend £3bn a year on scrapping the controversial two-child benefit limit in full, a move the government said would lift 450,000 children out of poverty.

“I don’t intend to preside over a status quo that punishes children for the circumstances of their birth,” the chancellor said to cheers from the Labour backbenches.

Reeves also promised to bear down on inflation with a package of cost-of-living measures, including removing green subsidies from household energy bills and freezing rail fares.

Levies on energy bills will now be paid out of general taxation, which the Treasury said could reduce bills by an average of £150 a year from next April.

Labour MPs and ministers praised the budget as a shift leftwards – saying it had bought Keir Starmer and Reeves time from a much-rumoured leadership challenge.

“This shows we are a full-blooded Labour government. In an ideal world we would have wanted welfare to come first but we are where we are. People want us to make an argument – so this is one. Wealthiest pay more and we protect those with greatest need,” one senior strategist said.

But several others said the OBR showed the fundamental weakness in the economy remained – and that the deep reservations about Starmer’s leadership would not be calmed by this budget. “This does nothing to move the fundamentals,” one minister said. “Yet again there was an opportunity for boldness which has led to nothing much.”

Another minister said: “This buys them a few months with backbenches and bond markets and it further cements hatred with my voters. But it delays the now inevitable reckoning.”

Reeves also announced the OBR will now only assess her against her fiscal rules once a year, at the autumn budget – a change aimed at avoiding renewed instability. She was responding to weaker economic forecasts from the OBR, which now expects average GDP growth of 1.5% over the next five years – 0.3% slower than previously expected.

Alongside the threshold freeze and the mansion tax, other revenue raisers announced by Reeves included a £1.1bn increase in tax on online gambling and a 3p-a-mile levy on electric vehicles. Rishi Sunak’s 5p cut to fuel duty was extended to next summer, but it will start to rise from next September.

Gilt yields began falling even before Reeves stood up in the House of Commons, as traders digested the OBR’s budget document, mistakenly published on the watchdog’s website about 40 minutes before she was due to begin speaking.

Jonas Goltermann, the deputy chief markets economist at Capital Economics, said: “The gilt market is breathing a sigh of relief after the much-anticipated UK budget announcement today delivered less bad news than feared and the chancellor appears to have, so far, come out of a fraught fiscal process a bit stronger.”

Some analysts highlighted the heavily backloaded nature of Reeves’s plans, however, with borrowing set to be higher over the next three years, and the bulk of the tax rises scheduled for the end of the parliament, to ensure she can meet her fiscal rule of covering day-to-day spending with taxes.

“To bear down on borrowing in later years and deliver that increase in ‘headroom’, the chancellor is relying heavily on tax rises towards the back end of the parliament,” said Helen Miller, the director of the Institute for Fiscal Studies (IFS). “More borrowing for the next few years, then a sharp adjustment. Spend now, pay later.

“It’s one thing to promise a reduction in borrowing, and another to actually deliver it.”

Ruth Curtice, the chief executive of the Resolution Foundation, welcomed the moves on cutting the cost of living but echoed the IFS’s caution. “This budget leaves much of the fiscal repair job to 2028 and beyond. Economic winds could change dramatically between now and then. The chancellor has taken the sensible step to increase her wiggle room at the start of the parliament but the effects will be felt at the end,” she said.

Reeves addressed MPs in parliament on Wednesday night warning them that they would see a negative response on the newspaper front pages – but telling them it was up to them to sell the budget to voters.

“Now, we’ve got to win the argument, and we’ve got to win the argument every single day. We have to win the argument for the budget. We’ve got to campaign on the budget – and that is what we must now do,” she said.

The Conservative leader, Kemi Badenoch, dismissed Reeves’ statement as a “Benefits Street budget,” accusing her of “making ordinary people pay for her incompetence and her inability to face down Labour’s tax-hungry leftwing backbenchers”.

Soft-left MPs said it was a victory for those who had spent time since the welfare rebellion pushing the party leftwards. The revived Tribune group of MPs, likely to be a vehicle for any future leadership battle for a leftwing candidate, praised the chancellor, calling it a “Labour budget, demonstrating Labour values”.

But in a warning shot it said the budget should be “the start of a wider programme of modernisation. Future tax reforms must aim for simplicity, sustainability, and fairness – ensuring that hard work is rewarded, unearned income and wealth are taxed more consistently, and those with the broadest shoulders should continue to contribute proportionately to national renewal.”