The £2 bus fare cap will be replaced by a new £3 cap until the end of 2025 at this week’s Budget, the Prime Minister has confirmed.

Sir Keir announced the change during a speech in Birmingham, in which he also defended looming tax rises and confirmed millions in funding for local services to help get people back to work.

A Government source told the PA news agency that maintaining a cap on bus fares was “hard fought for in the Budget process” and is largely aimed at helping passengers in rural areas.

The source added that analysis commissioned by the Department for Transport found the £2 cap was “not financially sustainable for the taxpayer” and “offered poor value for money”.

However Cllr Keane Duncan, executive member for highways and transport at North Yorkshire Council, said: “Keir Starmer has given in, but only after pleas from rural communities like ours not to scrap the cap. It’s wrong that we have had to fight so hard to save an initiative that is particularly essential for bus services in communities like ours.

“The small saving this will generate means the decisions feels like penny pinching from rural areas, when the major cities have seen billions invested in transport there.

“And while the cap will continue, it will increase by 50 per cent, another hit on working people. The additional cost for a typical worker commuting daily will be around £500.

“There are also fears for the future of the cap after next year. We’re facing another increase or even the cap being scrapped altogether.

“We’ve worked so hard to protect routes across North Yorkshire, with the £2 fare cap serving as a critical lifeline. We must continue to fight against decisions that could harm passenger numbers and once again put services in peril.”

The bus fare increase will be part of Chancellor Rachel Reeves’ first Budget on Wednesday, as the Government tries to bridge what it has called a £22bn “black hole” in the public finances, but has already been labelled a “bus tax” by one opposition party.

Sir Keir told the audience: “On the £2 bus fare, first thing to say is the Tories only funded that until the end of 2024 and therefore that is the end of the funding in relation to a £2 capped fare.

“I do know how much this matters, particularly in rural communities where there’s heavy reliance on buses.

“And that’s why I’m able to say to you this morning that in the Budget we will announce there will be a £3 cap on bus fares to the end of 2025 because I know how important it is.”

Single bus fares in England have been capped at £2 outside London, where they are £1.75 per journey, for most routes, since January 2023. When it introduced the policy, the Conservative government said routes with some of the biggest per-journey savings were between Leeds and Scarborough (£13), Lancaster and Kendall (£12.50), and Plymouth and Exeter (£9.20).

The Liberal Democrats have labelled the change “a bus tax” and described bus services as “the backbone of economic activity in communities across our country”.

The party’s environment spokesman Tim Farron said: “Keir Starmer’s hike in the bus fare cap is without a doubt a bus tax.

“While this new Government has been left to make difficult choices, they cannot allow the burden of fixing the Conservatives’ mess to be on people and small businesses across the country.”

Mr Farron accused both Labour and the Conservatives of not understanding “that for rural communities, it doesn’t matter if the cap is £2 or £3 if they don’t have a bus service in the first place”.

Silviya Barrett, director of policy and research at pressure group Campaign for Better Transport, welcomed the Government not scrapping the cap completely, but described the change as “a significant increase that could be costly to many”.

She said: “The scheme’s success has proven that by making public transport more affordable, more people will use it, and we strongly urge the Government to put a plan in place to keep fares low for years to come.

“It is vital that the Government now carries out a full review of what other discount fares could replace the cap in the long-term to avoid any further rises.”

In the same speech on Monday, Sir Keir also said that the Chancellor will announce £240m in funding for local services to help get people back to work, when she delivers her fiscal statement in two days’ time.

The Prime Minister also defended the tax rises expected on Wednesday.

He said “better days are ahead” and that “tax rises will prevent austerity and rebuild public services”.