Britain’s new Labour government on Wednesday announced major tax hikes and higher borrowing to meet Prime Minister Keir Starmer’s aim of investing for long-term growth.
In the highly-anticipated fiscal update — the first under the centre-left government after 14 years of Conservative rule — finance minister Rachel Reeves said tax increases would raise an additional £40 billion ($52 million).
‘Invest’
Addressing parliament in a speech lasting more than one hour, Reeves also confirmed changes to fiscal rules that will allow the government to invest billions more in public services.
“This government was given a mandate,” Reeves told MPs.
“To restore stability to our country and to begin a decade of national renewal. The only way to drive economic growth is to invest, invest, invest,” she insisted.
Labour won a landslide general election in July and had already announced a raft of economic measures, including improved workers’ rights and minimum wages, a vast green-energy plan and plans for mass building of homes.
Ahead of the budget, it also drew strong criticism for scrapping a winter-fuel benefit scheme for millions of pensioners, hurting Starmer’s approval rating in polls.
“I am restoring stability to our public finances and rebuilding our public services,” Reeves said Wednesday.
Reeves said £25 billion would come from hiking employers’ national insurance — a payrolls tax used to help pay for social care.
The pound won back ground as Reeves spoke, while London’s stock market was little changed.
“At this stage, massive tax rises have not spooked financial markets”, said Kathleen Brooks, research director at traders XTB.
The government kept its pledge not to raise income taxes, employee national insurance charges, or value added tax.
Outgoing Tory leader Rishi Sunak, Britain’s former prime minister, said the budget contains “broken promise after broken promise”.
He accused the government of “delivering a tidal wave of anti-business regulations”.
Borrowing
Ahead of her tax and spend plans, Reeves made a technical change to the way UK debt is measured to allow her to borrow more, even though the country’s public sector borrowing is now at levels last seen in the 1960s.
To boost investment, the chancellor will use a wider measure of debt that takes into account the future returns on investment.
Reeves on Wednesday said the extra investment in capital infrastructure projects would start to “repair the fabric of our nation”.
The government will invest billions of pounds to rebuild schools, hire teachers and fund childcare.
In a surprise move, she extended the freeze on fuel duty until next year.
The cash-strapped National Health Service will receive a substantial boost, with the day-to-day health budget receiving an increase of nearly £23 billion.
But there are costs to borrowing more, said Institute for Fiscal Studies director Paul Johnson.
“The challenge will be to make sure the money is spent well enough to make those costs worth bearing,” he said.
Economic growth
Alongside the budget, Reeves said Britain’s economy was set to grow faster than forecast this year and next.
The nation’s gross domestic product will expand 1.1 percent in 2024 and by 2.0 percent next year — above estimates given in March by the Office for Budget Responsibility (OBR), Britain’s fiscal watchdog.
Britain is benefiting from its annual inflation rate dropping to under the Bank of England’s 2.0-percent target, easing a cost-of-living crisis.
The International Monetary Fund this month also estimated that Britain’s economy would grow 1.1 percent in 2024.
Looking beyond next year, the OBR on Wednesday downgraded Britain’s growth forecasts for the 2026-2028 period.
