Chancellor of the Exchequer Rachel Reeves, centre, and Chief Secretary to the Treasury Darren Jones leave 11 Downing Street, London, before delivering the Budget in the Houses of Parliament on Oct. 30.Stefan Rousseau/Reuters
Britain’s Labour Party came into office last summer promising a radical change in how the country was governed. On Wednesday the new government signalled its intentions by unveiling a budget that includes the largest tax hike in decades and hefty increases in public spending and borrowing.
The Chancellor of the Exchequer, Rachel Reeves, said the budget reflected difficult choices and a need to address a £22-billion ($39.7-billion) shortfall that she said had been left by the outgoing Conservatives. She also said the government’s goal was to rebuild the country’s social network and in particular the National Health Service.
“The choices I have made today are the right choices to restore stability to our public finances, to protect working people, to fix our NHS and to rebuild Britain,” she told the House of Commons.
Most of the tax increases were aimed at businesses and high-income earners.
Employer contributions to the national insurance program, which pays for the state pension and other benefits, will increase from 13.8 per cent to 15 per cent of employee wages, which will raise an extra £25-billion a year over five years.
The government is also increasing the tax on capital gains, tightening the rules surrounding inheritance tax and jacking up the amount of tax paid on the sale of second homes. Ms. Reeves also announced that sales tax will be added to private school tuition, which had been exempt from the charge.
The overall tax increases totalled £40-billion, or $72-billion a year, representing the largest budgetary tax rise since 1993, according to the Institute for Fiscal Studies, a London-based economic think tank.
“Tax is now on a path to 38.2 per cent of GDP, its highest level ever in the U.K., as the Chancellor seeks to shore up public services,” said IFS director Paul Johnson. “But the Chancellor wanted to go further on spending, and so she’s also topping up public service budgets through borrowing in the next couple of years.”
Ms. Reeves plans to increase government borrowing by more than £20-billion annually to pay for a host of infrastructure projects and overall spending by departments is forecast to rise by £70-billion annually, with much of the increase going to health care, education and defence.
Not much of this was promised by the Labour Party when it won a massive majority in the election in July and ended 14 years of Conservative rule.
During the election campaign, party leader Keir Starmer was vague about his fiscal priorities beyond promising not to increase taxes on working people. Since taking office as Prime Minister, Mr. Starmer has said the new government had to make hard decisions but he and Ms. Reeves insisted that none of the budget measures went against their campaign promises. “Working people will not see higher taxes in their payslips as a result of the choices I make today,” Ms. Reeves said on Wednesday.
However, several observers pointed out that increasing the tax burden on businesses would almost certainly affect workers through wage cuts or hiring freezes.
“It seems highly likely that it will have an impact on the level of wages that firms who are facing higher taxes on employing people will pay,” said David Miles of the Office for Budget Responsibility, an independent government watchdog. In its analysis of the budget, the OBR said that three-quarters of the impact of the increased employer National Insurance contribution will be felt by employees, even if the changes don’t show up on pay slips.
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Businesses were also grappling with the government’s announcement of an increase in the national minimum wage. The hourly rate will go up by nearly 7 per cent to £12.21 for workers 21 and older, and by 16 per cent to £10 for employees between the ages of 18 and 20. Younger works will see wages rise 18 per cent to £7.55 an hour.
“This is a tough budget for business,” said Rain Newton-Smith, chief executive of the Confederation of British Industry. “The hike in National Insurance contributions alongside other increases to the employer cost base will increase the burden on business and hit the ability to invest and ultimately make it more expensive to hire people or give pay rises.”
Ms. Reeves has been hoping that the additional spending and infrastructure projects will help boost economic growth. But the OBR largely threw cold water on those hopes.
The office said the economy was expected to grow by just over 1 per cent this year and by 2 per cent in 2025. However, the OBR said growth would slow to 1.5 per cent in each of the next three years, lower than its last forecast in March. “Budget policies temporarily boost output in the near term, but leave GDP largely unchanged in five years,” the OBR said.
Conservative Party Leader Rishi Sunak denied that the previous administration had left a £22-billion hole in public finances and he criticized Ms. Reeves for breaking Labour’s election promises.
“Time and again, time and again, we Conservatives warned Labour would tax, borrow and spend far beyond what they were telling the country. And time and again, they denied they had such plans,” said Mr. Sunak, who is stepping down as party leader on Saturday. “But today, the truth has come out; proof that they planned to do this all along.”