Britain’s new Labor-led government has said it will significantly raise taxes and borrow more for investment as it seeks to lift the country out of a long period of economic stagnation.
Chancellor of the Exchequer Rachel Reeves presented her first budget – and the first by a woman – to parliament on Wednesday. In a nearly 80-minute speech, Ms Reeves announced around 40 billion pounds ($51.8 billion) in tax increases, more than half of which would come from higher taxes employers pay on their workers’ salaries. He also increased capital gains and inheritance taxes.
“The choices I’ve made today are the right choices for our country,” Ms Reeves said. “That doesn’t mean these choices are easy.”
The budget was Labour’s first major chance to set Britain’s economic agenda after 14 years in power and swept to power in July’s general election.
After a tumultuous first few months, the budget is seen as a moment of reset for Labor. Keir Starmer, the prime minister, said this week the budget would “guide” the government towards its priorities of ensuring fiscal stability, improving public services and encouraging investment.
For several months, Ms. Reeves had warned there would be “tough” choices to be made over the budget, suggesting Britons would now have to swallow the pain for a bigger payday. Government officials have said the selections will help the Group of 7 achieve the government’s goal of making Britain the fastest growing economy.
“This budget provides the largest increase in spending, taxes and borrowing of any fiscal event in history,” said Richard Hughes, head of the Office for Budget Responsibility, an independent watchdog.
Mrs. Reeves increased public spending by £70 billion a year over the next five years, half of which would be paid for by higher taxes. These changes will make the tax burden — a measure of tax revenue as a share of GDP — the highest on record.
By the end of the decade, employers’ contributions to National Insurance, which funds state benefits including pensions, will total more than £25 billion a year. Three-quarters of the cost will be sent to workers through lower wages, Mr. Hughes said.
However, Ms. Reeves has shown little restraint in the face of pressure to pump more money into Britain’s struggling public services. Over the next few years, he announced more money, especially for teachers, security and local authorities. But starting in 2026, after accounting for inflation, day-to-day spending for government departments will grow an average of 1.3 percent annually, which Institute for Fiscal Studies analysts said would still leave some departments with very tight budgets.
At the same time, Ms. Reeves also plans to increase public investment. He said the government would increase capital spending by £100bn over the next five years to invest in projects such as school buildings, hospital beds and diagnostic centres.
Overall, the Office for Budget Responsibility said Ms. Reeves’ measures would help the economy temporarily but remain “largely unchanged” over five years. It forecast slightly higher growth for this year and next, but said growth would slow to less than 2 percent a year. However, continued increases in public investment will boost the economy’s supply capacity, which will boost long-term growth, the Office for Budget Responsibility said.
In the midst of geopolitical conflicts and climate change, Ms. Reeves said the budget was the first step in Labour’s efforts to make the British economy more resilient.
“There are no shortcuts, to deliver economic investment, we need to restore economic stability and turn the page on the last 14 years,” Ms Reeves said.
He accused the Conservatives of “fiscal irresponsibility” for cutting taxes and overspending before the election, leading to a £22 billion “black hole” in the public purse. Former Prime Minister Rishi Sunak said on Wednesday that the Labor Party had broken its promise not to raise taxes on working people.
In a bid to avoid a repeat of the economic chaos that followed former prime minister Liz Truss’ “mini budget” two years ago, Ms. Reeves has promised to adhere to strict financial rules. Although the government has promised no return to austerity measures, the day-to-day costs of government departments must be paid for by tax revenue by the end of this decade.
Ms Reeves also said she would ensure debt levels fell, but changed the level of targeted debt to cover the government’s financial assets to allow more borrowing for investment. According to that scale, the debt will be reduced in three years.
Yields on British government bonds rose as investors digested the budget announcement and plans for more borrowing. The 10-year bond yield rose to 4.36 percent, the highest since late May.
“Accepting a broader range of debt is a step in the right direction, and permissive fiscal rules will help allow more public investment,” said Adrian Pabst, deputy director of the National Institute for Economic and Social Research. But, he added, “the government has widened the financial crisis rather than lifting it.”
