UK chancellor Rachel Reeves has announced a £40bn tax increase, the biggest in a generation, with business bearing the brunt of a Budget she said would fix Britain’s “broken” public finances and public services.
Extra borrowing averaging £28bn a year over the parliament unsettled investors on Wednesday, pushing government borrowing costs — which had already risen sharply ahead of the budget — to a five-month high.
The decision to increase tax, spending and borrowing is a big gamble for Reeves, the first woman to hold the position of chancellor in the 800-year history of the post.
The massive tax rise, which will fund a big increase in spending on the NHS and schools, will take Britain’s tax burden to a record high. It was accompanied by a planned £100bn rise in capital spending — funded by the extra borrowing — over the parliament.
“These choices aren’t easy but they’re responsible,” Reeves told the House of Commons, to ecstatic cheering from Labour MPs. Conservative leader Rishi Sunak said she had “broken promise after promise”.
Most of the tax increase will come from a £25bn rise in national insurance paid by employers, which will go up by 1.2 percentage points to 15 per cent from April. The level at which employers start paying NI for workers will drop from £9,100 to £5,000.
Business groups have warned that increasing NI for employers may force some companies to dismiss staff or close at a time when wages and other labour costs are also increasing.
About £9bn a year will be raised from higher taxes on groups including people who benefit from the “non-dom” scheme for wealthy foreigners’ overseas income, as well as private schools, energy companies and private equity chiefs.
As part of its move to abolish the non-dom regime, the government said it would end the use of offshore trusts to shelter assets from UK inheritance tax, ignoring warnings that such a move could spark an exodus of rich people from the UK.
The chancellor added that, instead of the scheme, the UK would introduce a new “internationally competitive” residence programme.
Reeves announced an immediate increase in capital gains tax, with the lower rate rising from 10 per cent to 18 per cent, and the higher rate from 20 per cent to 24 per cent. She also said increases in inheritance tax — notably applying it to pensions — would yield £2bn a year.
In a move closely watched by private equity executives, she said Labour would increase the capital gains rates on carried interest to 32 per cent from April, up from 28 per cent.
While the change fell short of taxing carried interest in line with the top rate of income tax of 45 per cent, advisers warned that by suggesting there was a “compelling case” for further reforms of carried interest, Reeves had left the door open to further tax hikes.
In a boost to people at the other end of the income spectrum, the chancellor confirmed that the UK’s national living wage would rise by 6.7 per cent to £12.21 from next April, with a bigger increase for the youngest workers.
UK government bonds initially welcomed Reeves’ remarks, but began to sell off after the Treasury published figures showing debt sales will rise to £300bn in the current fiscal year, up from the previous estimate of £278bn and above investors’ expectations.
The 10-year gilt yield climbed to 4.37 per cent from a low of 4.21 per cent during Reeves’ speech.
The benchmark FTSE 100 was trading down 0.6 per cent, while the more domestically focused mid-cap FTSE 250 was up 0.3 per cent, boosted by a rally in energy companies’ shares.
In a reference to the disastrous impact on bond markets from Liz Truss’s 2022 “mini” Budget, Vivek Paul, UK chief investment strategist at BlackRock, said pre-Budget briefings had “broadly had the desired effect on markets for now, with the reaction in gilt yields a far cry from the 2022 episode”.
The chancellor said the Budget would stabilise the public finances, patch up crumbling public services such as the NHS and pave the way for higher growth.
In total, she increased taxes by £41.1bn a year by the end of the forecast period in 2029/30 with spending — including capital investment — increasing by £74.1bn in the same year, leaving Reeves with a funding gap of £32.9bn.
The independent Office for Budget Responsibility said the overall effect of Reeves’ Budget decisions would be to “push up CPI inflation by around half a percentage point at their peak”.
It added that real disposable income per person, a measure of living standards, will be 1.25 per cent lower by the start of 2029 than was forecast in March.
Reeves’ tax rise, one of the biggest in a Budget as a share of national income, outstripped the increases of her predecessors Rishi Sunak in 2022, George Osborne in 2010 and Gordon Brown in 2002.
Some content could not load. Check your internet connection or browser settings.
Some content could not load. Check your internet connection or browser settings.
Tax as a share of GDP was forecast by the OBR to rise from 36.4 per cent this year to a historic high of 38.2 per cent in 2029/30.
Reeves announced a £6.7bn increase in capital investment in education, a 19 per cent increase in real terms on this year.
She also promised a £22.6bn rise in the “day to day” health budget over two years, and a £3.1bn increase in the NHS capital budget, in what she described as the largest real-terms increase since 2010, outside of the Covid-19 pandemic.
But she said that she would not prolong a freeze on thresholds for personal income tax and national insurance beyond the 2028 date planned by the last government.
The chancellor maintained the UK’s long-standing freeze on fuel duty, but increased taxes on corporate jet use.
Pledging that the UK would not return to austerity, she said departmental day-to-day spending would grow by 1.5 per cent in real terms from next year, compared with the previously planned 1 per cent, in what remains a tight expenditure settlement.
Capital spending expenditure will grow by 1.7 per cent in real terms.
In a combative Budget speech, Reeves said the previous Conservative government “hid the reality of their public spending plans” from the electorate and the OBR, the independent forecaster.
“Never again will we allow a government to play fast and loose with the public finances,” she told parliament. But Sunak said the OBR made no mention of the £22bn “black hole” that Reeves claimed to have discovered.
Reeves confirmed that the government’s new investment rule would define debt as “public sector net financial liabilities”, in a move that will increase scope for borrowing. She added that under the government’s new rules, net financial debt will fall in the third year of every forecast.
The OBR predicted the chancellor’s Budget would put her on track to meet her revised debt rule two years ahead of schedule, leaving her with £15.7bn room for manoeuvre.
Debt as measured under the previous rubric — underlying public sector net debt — is still set to increase throughout the parliament until the end of the decade.
In forecasts accompanying the Budget, the OBR said that real UK GDP growth would be 1.1 per cent this year, 2 per cent in 2025, 1.8 per cent in 2026 and at 1.5 per cent to 1.6 per cent for the rest of the decade.
Additional reporting by Ian Smith and Harriet Agnew
