Taxes, spending and borrowing rise as new Labor government seeks to ‘rebuild’ Britain

LONDON — British Treasury chief Rachel Reeves on Wednesday raised taxes by about 40 billion pounds ($52 billion) to plug a hole she said she found in public finances and fund Britain’s cash-strapped public services as a powerful budget that could set the political tone for years to come.

In Labour’s first budget since returning to power after 14 years in July, Reeves also changed the UK’s debt rules – a move that will allow the government to borrow more to, as she explained, “invest, invest, invest”. figures described as “the game in the books”.

Her biggest cash commitment was an extra £25 billion for the cherished National Health Service, which has seen waiting lists rise to record levels in the wake of the coronavirus pandemic.

“The choice I made today is the right choice for our country,” Reeves said at the end of his nearly 80-minute statement. “To restore stability to our public finances. To protect workers. To fix our NHS. And restore Britain.”

The overall tax increase, which is proportionately the largest in three decades, is largely driven by increases in taxes that businesses pay to employ people. Reeves said this was necessary because of the economic “black hole” left by the previous Conservative government.

According to the independent Office for Budget Responsibility, the overall tax burden is forecast to rise from 36.4% of annual UK GDP in 2024/25 to a “historic high” of 38.3% in 2027/28.

The biggest single tax increase – at £25 billion – is a 1.2 percentage point increase in national insurance contributions paid by employers, which will be paid on lower wages. The levy, which was originally intended to pay benefits and help fund the NHS, but which is actually included in the overall tax levy, will remain unchanged for employees. Reeves insisted many small businesses would not be affected as she doubled the benefit that helps them offset their liabilities.

Billions more would come from increasing capital gains taxes and closing loopholes in the way inherited money is taxed, as well as raising taxes on those who fly private jets or send their children to fee-paying schools.

One tax that surprisingly remained unchanged was the levy that drivers pay at the pump, but taxes on alcoholic drinks were increased, although a pint of draft beer or cider was reduced by a penny.

Reeves used some of the collected taxes, as well as additional borrowing, to increase spending in a number of government departments, including education. Schools will receive more money to create breakfast clubs and upgrade facilities.

It also set aside £11.8 billion to compensate victims of the tainted blood scandal in the 1970s and 1980s and £1.8 billion to compensate victims of the Horizon Post Office scandal, which saw hundreds of branch managers wrongly convicted of theft and fraud. faulty computer system.

The centre-left Labor Party won a landslide victory in the July 4 election, promising to end years of turmoil and scandal under successive Conservative governments, boost Britain’s economy and rebuild frayed public services. But the scale of the measures announced on Wednesday by Reeves overwhelmed Labour’s cautious general election campaign.

Reeves and Prime Minister Keir Starmer say they inherited an economy that was in far worse shape than they thought.

Reeves said her budget measures were needed to “fix the fundamentals” of the economy, which she argued had been undermined by the Conservatives. They insist they have brought back control of an economy that has been growing, albeit modestly, and borrowing since the pandemic and soaring energy prices following Russia’s invasion of Ukraine.

During the election, the Labor Party said it would not raise taxes on “working people” – a vague term whose definition has been hotly debated in the media for weeks. While Reeves did not increase income or sales taxes, the Conservatives said raising taxes on employers was a breach of Labour’s election promise and would lead to lower wages.

“We Conservatives have warned time and time again that Labor would tax, borrow and spend far more than they told the country to,” said Rishi Sunak, the former prime minister who leads the party until Saturday’s his successor will be announced.

“And again and again they denied that they had any such plans. But today the truth came out.”

Reeves – Britain’s first female chancellor of the exchequer since the position was created 800 years ago – also said she was adjusting public debt rules to take into account both assets and liabilities. Essentially, this change would free up billions more dollars for investment in health care, schools, transportation and other major infrastructure projects, especially as we transition to net zero.

While this budget may be the most significant since 2010 following the global financial crisis, Reeves will be careful not to cause concern in financial markets. Liz Truss’s short-lived premiership collapsed two years ago after a series of unfunded tax cuts roiled financial markets and sent borrowing costs soaring.

Early signs point to some nervousness in markets, with interest rates on British government debt rising following Reeves’ announcement.

Part of the reason is that big changes in taxes and spending don’t seem to have much impact in supporting the economy. The Office for Budget Responsibility, which provides forecasts to the government, said the economy would gain momentum over the next couple of years, but growth thereafter would be lower than previously thought.

Thomas Pope, deputy chief economist at the Institute of Government, said the budget marked a “really big shift”, particularly on the tax front.

“The proceeds from these tax dollars will be spent on public services, on investments that Rachel Reeves hopes, at least five years from now, will mean people will feel better at the next election than they do now,” he said.

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Associated Press video journalist Kwiyoung Ha contributed to this story: