UK Treasury chief unveils budget with £40b in tax hikes

British Treasury chief Rachel Reeves told lawmakers on Wednesday that taxes will rise by £40 billion (US$52 billion) in order to plug a hole in the public finances and provide new funding for the United Kingdom’s cash-starved public services, in a wide-ranging budget statement that could set the tone for years to come.

In the Labour Party’s first budget since returning to power earlier this year after 14 years in opposition, Reeves also changed the UK’s debt rules – a move that will allow the government to borrow more or as she explained, “invest, invest, invest”.

Her biggest cash commitment was an additional £25 billion 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,” she said at the end of her statement, which lasted the best part of 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 is the biggest for 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 in the UK is forecast to rise from 36.4 per cent of the UK’s annual GDP in 2024-25 to a “historic high” of 38.3 per cent in 2027-28, according to the independent Office for Budget Responsibility.

The biggest single tax increase – worth £25 billion – is a rise of 1.2 percentage points in national insurance contributions paid by employers. The levy, which pays for benefits and helps fund the NHS, will remain unchanged for employees. Reeves insisted that many smaller businesses will not be affected, as she doubled the salary threshold at which they start paying it.

Billions more will also come from increases in capital gains tax and closing loopholes in the way inherited money is taxed, while other revenues will come from potentially politically attractive sources, such as 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 pump, while taxes on most alcoholic drinks were increased – a pint of draught beer or cider was cut by a penny, though.

As well as increasing taxes, Reeves also raised spending for a number of departments, aside from health. Schools will get more, for example, this year, which will be used to create breakfast clubs for young students and upgrade facilities.

She also set aside £11.8 billion to compensate those affected in an infected-blood scandal that saw tens of thousands of people contracted HIV or hepatitis from transfusions of tainted blood and blood products in the 1970s and 1980s; and £1.8 billion to compensate victims of the Post Office Horizon scandal, which saw hundreds of branch managers wrongly convicted of theft and fraud as a result of a faulty computer system.

The centre-left Labour party was elected on July 4 after promising to end years of turmoil and scandal under Conservative governments, get Britain’s economy growing, and restore frayed public services. But the scale of the measures announced on Wednesday by Reeves was not hinted at during Labour’s cautious general election campaign nor in its manifesto for government.

Since being elected in a landslide victory, Prime Minister Keir Starmer and Reeves have said they inherited an economy that was in a far more parlous state than they thought. However, they have maintained that there would be no repeat of the austerity that marked the early years of the previous Conservative government after it was first elected in 2010.

Reeves said her budget, which included a big increase in borrowing too, was needed to “fix the foundations” of an economy that, it argues, has been undermined by 14 years of Conservative government.

The Conservatives say they left an economy that was growing, albeit modestly, with debt trending lower.

Reeves — the UK’s first female chancellor of the exchequer, a position that has existed for some 800 years — 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.

AP