By Alistair Smout

LONDON (Reuters) -British Prime Minister Keir Starmer said taxes needed to rise to rebuild public services and fix the foundations of the economy, and he challenged his critics to spell out how they would tackle the country’s “unprecedented” problems.

On Wednesday, finance minister Rachel Reeves will set out her first tax and spending plans which must address a difficult fiscal picture without raising major taxes on workers, cutting spending in priority departments or spooking investors with excessive borrowing.

Starmer, whose Labour Party won a landslide election victory in July, said in a speech on Monday that tough trade-offs were needed to “fix the foundations” of the economy.

“We have to be realistic about where we are as a country… These are unprecedented circumstances,” he said, noting his government, unlike its predecessors in 1997 and 2010, had to deal with both a weak economy and poor public services.

“But I won’t offer it as an excuse. I expect to be judged on my ability to deal with this,” he added.

Labour would borrow to drive growth and increase taxes to “prevent austerity and rebuild public services”, he said.

The government is looking to find around 40 billion pounds in tax rises and spending cuts to address the fiscal gap while putting more money into areas like health and education.

Starmer said he rejected the “fiction you can lower taxes (and) spend more on public services without making any changes”.

Shortly after the election, Reeves said the fiscal situation was worse than thought due to a 22 billion-pound ($28.5 billion) black hole she said she had inherited from the previous Conservative government.

INVEST IN THE FUTURE

Reeves has said she will change the definition of public debt in the government’s fiscal rules to allow it to borrow more to invest in the hope of speeding up economic growth.

We have to move to a situation where we invest in the future of this country,” Starmer said. I do not accept the proposition that it will have an impact on interest rates.

He said 240 million pounds would be spent on helping people back into work, and a two pound cap on bus fares would be replaced by a three pound cap next year.

Much of the build-up to the budget has been dominated by a debate over the definition of “working people.

The government has pledged not to raise social security contributions paid by employees, but critics say working people might still bear the cost if the government increases the contributions paid by employers instead, or raises taxes on their savings.

Starmer said he was prepared to have a debate about the definition of working people but his chief concern was that there was “no more tax in their payslip.

The Conservatives have challenged the new government’s assessment of the public finances, saying they are a pretext for tax rises that Labour had been planning already.

($1 = 0.7717 pounds)

(Reporting by Alistair Smout, additional reporting by Sachin Ravikumar, Editing by Angus MacSwan, Paul Sandle and Christina Fincher)