Britain’s new finance minister Rachel Reeves has announced the biggest tax increases in three decades in her first budget and pledged to boost UK defence spending.
In her budget address on October 30, the Labour Chancellor of the Exchequer accused the previous Conservative government of leaving public services broken when it lost July’s election after 14 years in power.
Reeves said she would raise taxes by £40 billion (€47.9 billion) a year – much of it falling on businesses – to cover a £22 billion (€26.3 billion) shortfall inherited by her Labour Party, the lack of compensation payments, including for victims of an infected blood scandal, and under-funding of public services.
“Any Chancellor standing here today would face this reality,” Reeves said in her speech.
“And any responsible Chancellor would take action. That is why today, I am restoring stability to our public finances and rebuilding our public service.”
At the same time the finance minister said she would provide the defence ministry with an additional £2.9 billion (€3.4 billion) in 2025 and promised an annual £3 billion (€3.6 billion) support for Ukraine would continue for “as long as it takes”.
She said the extra spending would take Britain towards its goal of allocating 2.5 per cent of GDP towards defence, and ensure the country exceeded the NATO commitment of spending 2 per cent.
Reeves had said she would not let public debt balloon, mindful of how former Conservative prime minister Liz Truss sent the bond market into a tailspin two years ago with unfunded tax cut plans.
Initial reaction to Reeves’ speech suggested investors were taking her plans well, with government bond prices rising further as she addressed parliament.
According to the Institute for Fiscal Studies think-tank, tax hikes of £40 billion would be equivalent to 1.25 per cent of economic output, surpassed in recent history only in 1993 by a budget plan under the Conservatives, which raised taxes to shore up the public finances after a recession and currency crisis.
Reeves said she would increase the rate of social security contributions paid by employers by 1.2 percentage points to 15 per cent from April next year and lower a threshold at which firms start to pay it. Those moves would raise an extra £25 billion (€29.9 billion) a year in five years’ time, she stated.
Company bosses had warned that higher taxes on them, 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.
Reeves also announced a string of other revenue-raising moves including changes to the tax rules on capital gains and inheritances and tax paid by private equity executives and non-domiciled residents.
UK Prime Minister Keir Starmer had warned “those with the broadest shoulders” would have to pay more tax.
But Reeves ruled out making more individuals pay basic and higher income tax rates by extending a freeze on the threshold for payments beyond its scheduled expiry in the 2028/29 tax year.
She also extended a freeze on fuel duty and a cut a tax on beer served in pubs.
Reeves also said Britain’s economy was forecast to grow by more than expected this year and in 2025 but by less than previously forecast in the following three years.
Bond strategists said they were confident that Reeves – a former Bank of England economist – would be more cautious than Truss, whose big tax-cut plans hammered British debt prices in 2022 and led to her resignation.
Regarding defence spending, Reeves added that the promise to maintain the annual military support to Ukraine came on top of a £2.26 billion (€2.71 billion) loan, part of the G7’s Extraordinary Revenue Acceleration agreement announced a few days earlier, to aid the country in its war against Russia.
