Britain’s new finance minister Rachel Reeves is set announce what may be the biggest tax hikes in three decades in a bid to fix the country’s sagging public services, alongside billions of pounds of extra borrowing to overhaul the economy.
On October 30, the Labour government will be betting that its first budget after 14 years of Conservative rule can fund its election pledges without triggering the kind of bond market chaos that brought down former Tory prime minister Liz Truss in 2022.
Labour has promised voters it would cut long waiting lists in the State-run National Health Service, build more housing and improve schools.
“It falls to this Labour Party, this Labour government, to rebuild Britain once again,” Reeves said in an excerpt of her budget speech shared with media on October 29.
Four months on from the UK general election, Prime Minister Keir Starmer has said that “those with the broadest shoulders” would have to pay more tax under the budget plan that Reeves will announce to parliament at around 12.30 GMT.
Britain’s previous Conservative government left an undisclosed £22 billion (€26.4 billion) hole in the public finances, Reeves has argued – a claim rejected by her predecessor Jeremy Hunt.
Companies face higher social security costs which, combined with planned new protections for workers and an increased minimum wage, could undermine Labour’s promises to turn Britain into the fastest-growing Group of Seven (G7) economy.
London-based polling firm Savanta said its measure of business optimism – such as recent consumer confidence surveys – had hit its lowest in October since Labour won power in July.
“Keir Starmer and Rachel Reeves will likely be concerned how quickly years of goodwill among businesses appears to have dissipated,” said Matt McGinn, a consultant at Savanta.
The richest Britons are also likely to face higher taxes on capital gains, dividends, inheritances and wealth held abroad, pushing the country’s tax burden up further, which is already the highest since shortly after World War Two.
Government sources have said Reeves planned around £40 billion (€48.1 billion) worth of fiscal measures, mostly from tax increases, to meet her pledge to cover day-to-day spending.
According to the think-tank Institute for Fiscal Studies, tax hikes of £40 billion would be equivalent to 1.25 per cent of economic output, only surpassed in recent history in 1993 by Conservative budget plans, which raised taxes to shore up the public finances after a recession and currency crisis.
As well as raising taxes to cover day-to-day spending, Reeves has said she would try to reassure investors that an expected £20 billion (€24 billion) increase in borrowing for public investment would be positive for the world’s sixth-biggest economy.
“The only way to drive economic growth is to invest, invest, invest,” Reeves said in the speech excerpts. “There are no shortcuts. To deliver that investment we must restore economic stability.”
Reeves has said she planned to relax the UK Government’s self-imposed fiscal rules to allow the kind of infrastructure investment needed to speed up growth.
A reported change in the rules could free up an extra £53 billion (€63.75 billion) to borrow, which has prompted some jitters in the debt market in October
Bond dealers polled by Reuters expected government borrowing this financial year to rise to £105 billion (€126.3 billion) from a March estimate by the Office for Budget Responsibility of £87 billion (€104.6 billion), requiring bond issuance to grow to £294 billion (€353.6 billion) – its second-highest on record.
Despite that, bond strategists and fund managers have said they were confident that Reeves – a former Bank of England economist – would not blow a Truss-style hole in the public finances.
Unlike in 2022, when Truss shocked already nervous financial markets with her tax-cut plans, interest rates have been coming down in the world’s richest economies, offering a bit more leeway for Reeves.
Peder Beck-Friis, an economist with global bond investors PIMCO, said: “While the new debt target may allow for more spending in the future, possibly in a second term, the government is likely to proceed cautiously, loosening policy only after establishing credibility or if market conditions change.”
