The UK chancellor Rachel Reeves has unveiled a £40bn tax hike, the largest in a generation, with businesses taking the brunt of a Budget aimed at fixing Britain’s “broken” public finances and services.
Extra borrowing averaging £28bn per year over the parliament has unsettled investors, pushing government borrowing costs to a five-month high.
The decision to increase taxes, spending, and borrowing is a significant gamble for Reeves, the first woman to hold the position of chancellor in the 800-year history of the post.
The substantial tax increase, which will finance a significant rise in spending on the NHS and schools, will elevate Britain’s tax burden to a record level. It was accompanied by a planned £100bn increase in capital spending funded by the additional borrowing over the parliament.
“These choices aren’t easy but they’re responsible,” Reeves stated in the House of Commons, receiving ecstatic cheers from Labour MPs. Conservative leader Rishi Sunak said she had “broken promise after promise.”
Most of the tax increase will come from a £25bn rise in national insurance paid by employers, with a 1.2 percentage point increase to 15 per cent from April. The threshold at which employers begin paying NI for workers will decrease from £9,100 to £5,000.
Business groups have cautioned that raising NI for employers might lead some companies to lay off staff or close, especially as wages and other labor costs are also rising.
Around £9bn per year will be generated from higher taxes on various groups, including beneficiaries of the “non-dom” scheme for wealthy foreigners’ overseas income, as well as private schools, energy companies, and private equity executives.
As part of the move to abolish the non-dom regime, the government announced it would end the use of offshore trusts to shield assets from UK inheritance tax, despite warnings that such a move could trigger an exodus of wealthy individuals from the UK.
The chancellor also mentioned that instead of the scheme, the UK would introduce a new “internationally competitive” residence program.
Reeves announced an immediate increase in capital gains tax, with the lower rate rising from 10 per cent to 18 per cent, and the higher rate from 20 per cent to 24 per cent. She also mentioned that increases in inheritance tax, particularly applying it to pensions, would generate £2bn annually.
In a move closely watched by private equity executives, she stated that Labour would raise the capital gains rates on carried interest to 32 per cent from April, up from 28 per cent.
Although the change falls short of taxing carried interest in line with the top rate of income tax of 45 per cent, advisers cautioned that by suggesting there was a “compelling case” for further reforms of carried interest, Reeves had left the door open to additional tax hikes.
In a boost to individuals at the lower end of the income spectrum, the chancellor confirmed that the UK’s national living wage would increase by 6.7 per cent to £12.21 from next April, with a larger increase for the youngest workers.
UK government bonds initially welcomed Reeves’ remarks but began to sell off after the Treasury released figures showing debt sales would climb to £300bn in the current fiscal year, exceeding investors’ expectations.
The 10-year gilt yield rose to 4.37 per cent from a low of 4.21 per cent during Reeves’ speech.
The benchmark FTSE 100 was trading down 0.6 per cent, while the more domestically focused mid-cap FTSE 250 was up 0.3 per cent, buoyed by a rally in energy companies’ shares.
Referring to the bond market turmoil from Liz Truss’s 2022 “mini” Budget, Vivek Paul, UK chief investment strategist at BlackRock, noted that pre-Budget briefings had “broadly had the desired effect on markets for now, with the reaction in gilt yields a far cry from the 2022 episode.”
The chancellor stated that the Budget would stabilize the public finances, address crumbling public services like the NHS, and pave the way for increased growth.
In total, she increased taxes by £41.1bn annually by the end of the forecast period in 2029/30, with spending, including capital investment, rising by £74.1bn in the same year, leaving Reeves with a funding gap of £32.9bn.
The independent Office for Budget Responsibility stated that Reeves’ Budget decisions would overall “push up CPI inflation by around half a percentage point at their peak.”
It also mentioned that real disposable income per person, a measure of living standards, would be 1.25 per cent lower by the beginning of 2029 compared to the forecast in March.
Reeves’ tax hike, one of the largest in a Budget as a share of national income, surpassed the increases made by her predecessors Rishi Sunak in 2022, George Osborne in 2010, and Gordon Brown in 2002.
Tax as a percentage of GDP was forecast by the OBR to rise from 36.4 per cent this year to a historic high of 38.2 per cent in 2029/30.
Reeves announced a £6.7bn increase in capital investment in education, a 19 per cent rise in real terms compared to this year.
She also pledged a £22.6bn increase in the “day-to-day” health budget over two years, as well as a £3.1bn boost in the NHS capital budget, which she described as the largest real-terms increase since 2010, excluding the Covid-19 pandemic.
However, she stated that she would not extend a freeze on thresholds for personal income tax and national insurance beyond the 2028 date planned by the previous government.
The chancellor upheld the UK’s long-standing freeze on fuel duty but increased taxes on corporate jet usage.
Assuring that the UK would not revert to austerity, she mentioned that departmental day-to-day spending would grow by 1.5 per cent in real terms from next year, compared to the previously planned 1 per cent, in what remains a tight expenditure settlement.
Capital spending expenditure would increase by 1.7 per cent in real terms.
In a forceful Budget speech, Reeves criticized the previous Conservative government for “hiding the reality of their public spending plans” from the electorate and the OBR, the independent forecaster.
“Never again will we allow a government to play fast and loose with the public finances,” she declared in parliament. However, Sunak argued that the OBR made no mention of the £22bn “black hole” that Reeves claimed to have discovered.
Reeves confirmed that the government’s new investment rule would define debt as “public sector net financial liabilities,” allowing for increased borrowing. She added that under the government’s new rules, net financial debt would decline in the third year of every forecast.
The OBR predicted that the chancellor’s Budget would put her on track to meet her revised debt rule two years ahead of schedule, leaving her with £15.7bn of leeway.
Debt measured under the previous rubric—underlying public sector net debt—is still projected to rise throughout the parliament until the end of the decade.
In forecasts accompanying the Budget, the OBR projected real UK GDP growth of 1.1 per cent this year, 2 per cent in 2025, 1.8 per cent in 2026, and 1.5 per cent to 1.6 per cent for the remainder of the decade.
Additional reporting by Ian Smith and Harriet Agnew
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