U.K. Labour’s first budget sees rise in taxes, spending and borrowing

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LONDON — British Treasury chief Rachel Reeves raised taxes Wednesday by around 40 billion pounds (US$52 billion) to plug a hole she claims to have identified in the public finances and fund the U.K.’s cash-starved public services, in a beefy budget that could set the political tone for years to come.

In the Labour Party’s first budget since regaining power after 14 years in July, Reeves also changed the U.K.’s debt rules — a move that will allow the government to borrow more to, as she explained, “invest, invest, invest,” but which opposition figures described as a “fiddling of the books.”

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Her biggest cash commitment was an additional 25 billion pounds for the cherished National Health Service, which has seen waiting lists rise to record levels in the wake of the coronavirus pandemic.

“The choices that I have made today are the right choices for our country,” Reeves at the end of a statement that lasted almost 80 minutes. “To restore stability to our public finances. To protect working people. To fix our NHS. And to rebuild Britain.”

The overall increase in taxes, which proportionately is the biggest in over three decades, comes in large part from an increase in the tax businesses pay for employing people. Reeves said it was needed because of the economic “black hole” left by the previous Conservative government.

The overall tax burden is forecast to rise from 36.4 per cent of the U.K’s annual GDP in 2024/25, to a “historic high” of 38.3% in 2027/28, according to the independent Office for Budget Responsibility.

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The biggest single tax increase — worth 25 billion pounds — is a rise of 1.2 percentage points in national insurance contributions paid by employers and which will be paid on lower salaries. The levy, which was originally designed to pay for benefits and help fund the NHS but which is really absorbed into the overall tax take, will remain unchanged for employees. Reeves insisted that many smaller businesses will not be affected as she doubled an allowance that helps them offset their liability.

Billions more will come from increases in capital gains tax and closing loopholes in the way inherited money is taxed, and raising taxes on those who use private jets or send their children to fee-paying schools.

One tax that was surprisingly left unchanged was the levy that drivers pay at the gas pump, but taxes on alcoholic drinks were increased — though a pint of draught beer or cider was cut by a penny.

Reeves used some of the taxes raised, along with extra borrowing, to increase spending for a number of government departments, including education. Schools will get more money to create breakfast clubs and upgrade facilities.

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She also set aside 11.8 billion pounds to compensate victims of an infected blood scandal in the 1970s and 1980s and 1.8 billion pounds to compensate victims of the Post Office Horizon scandal, in which hundreds of branch managers were wrongly convicted of theft and fraud as a result of a faulty computer system.

The center-left Labour party won a landslide election victory July 4 after promising to end years of turmoil and scandal under successive Conservative governments, get Britain’s economy growing and restore frayed public services. But the scale of the measures announced on Wednesday by Reeves exceeded Labour’s cautious general election campaign.

Reeves and Prime Minister Keir Starmer say they inherited an economy that was in a far more parlous state than they thought.

Reeves said her budget measures were needed to “fix the foundations” of an economy that she argued has been undermined by the Conservatives. They insist that they left an economy that was growing, albeit modestly, and borrowing back under control following the pandemic and the spike in energy costs in the wake of Russia’s invasion of Ukraine.

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During the election, Labour said it would not raise taxes on “working people” — a loose term whose definition has been hotly debated in the media for weeks. Though Reeves did not increase taxes on income or sales, the Conservatives said hiking taxes on employers was a breach of Labour’s election promise and would lead to lower wages.

“Time and again, we Conservatives warned Labour would tax, borrow and spend far beyond what they were telling the country,” said Rishi Sunak, the former prime minister who leads the party until his successor is announced on Saturday.

“And time and again, they denied they had such plans. But today, the truth has come out.”

Reeves — Britain’s first female chancellor of the exchequer since the position was created 800 years ago — also said she is tweaking the government’s debt rules by accounting for assets as well as liabilities. The change will in effect free up billions more for investment in health, schools, transport and other big infrastructure projects, particularly in the transition to net zero.

Though the budget is arguably the most consequential since 2010 in the wake of the global financial crisis, Reeves will have been careful not to cause concern in financial markets. Two years ago, the short-lived premiership of Liz Truss foundered after a series of unfunded tax cuts roiled financial markets and sent borrowing costs surging.

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Early signs suggested some nervousness in the markets, with the interest rates charged on British government debt edging higher following Reeves’ statement.

Part of the reason appears to be that big changes in tax and spend do not appear to be doing much to bolster the economy. The Office for Budget Responsibility, which provides the forecasts for the government, said the economy will get a boost over the coming couple of years but that growth subsequently will be lower than previously thought.

Thomas Pope, deputy chief economist at the Institute for Government think tank, said the budget marked a “really big shift,” particularly on tax

“The proceeds of that tax revenue is going to be spent on public services, on investments that Rachel Reeves will hope, in five years at least, means that people feel better off come the next election than they do right now,” he said.

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Associated Press video journalist Kwiyeon Ha contributed to this story,

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