UK chancellor Rachel Reeves has put a £40bn tax increase at the heart of a plan to fix the country’s “broken” public finances and public services, with business and the wealthy bearing the brunt of the biggest Budget tax hike in a generation.
Reeves also announced a sharp increase in borrowing to fund an extra £100bn of capital spending over the parliament, in a massive expansion of the state that will define political battle lines for years to come.
Last year Reeves told the Financial Times: “Taxes are at a 70-year high — I don’t have plans to be a big tax-raising chancellor.” In the event she unveiled the biggest tax rise since Tory chancellor Norman Lamont in 1993, elevating Britain’s tax burden to a record 38.2 per cent of GDP.
The independent Office for Budget Responsibility said it would push up inflation by up to half a percentage point and put upward pressure on mortgage rates.
The OBR also downgraded its growth forecasts for later in the parliament, projecting growth of 1.6 per cent in 2029, which is likely to be an election year.
But the chancellor was unapologetic, arguing the Budget would lay the foundations for higher growth, better public services — notably the NHS and schools — and lock in financial stability.
She told Labour MPs on Wednesday evening: “We’ve made our choices. I’m proud of them — let’s make the case.”
Conservative leader Rishi Sunak, in a swansong appearance, said she had “broken promise after promise”.
Extra borrowing averaging £28bn a year over the parliament unsettled investors, pushing government borrowing costs — which had already risen sharply ahead of the budget — to a five-month high.
Businesses warned that Reeves’ £25bn increase in national insurance on employers could chill hiring. The OBR forecast that bosses would pass on 76 per cent of the tax rise to workers through lower wages.
NI for employers will go up by 1.2 percentage points to 15 per cent from April, while the level at which employers start paying NI for workers will drop from £9,100 to £5,000. Smaller employers will be shielded.
“This is a tough budget for business to swallow,” said Shevaun Haviland, director-general of the British Chambers of Commerce.
Reeves’ Budget increased spending by £70bn in 2026-27, some 2 per cent of GDP. Taxes will rise by £34bn in the same year, leaving a further £35bn to be funded through higher borrowing.
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 from private school fees, 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 higher rate rising 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 affecting the private equity industry, she said Labour would increase the capital gains rates on carried interest to 32 per cent from April, up from 28 per cent, and opened the door to further increases.
But in an unexpected fillip to workers, 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.
UK government bonds initially rose after 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 index fell 0.7 per cent, while the more domestically focused mid-cap FTSE 250 climbed 0.4 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 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”.
Reeves announced £6.7bn more for 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 to bring down waiting lists.
Pledging that the UK would not return to austerity, she announced sharp increases in departmental spending in the near term, with much slower growth further out.
Public sector net investment, which had been forecast to drop from 2.5 per cent of GDP to 1.7 per cent by 2028-29, will now average 2.6 per cent over the course of the parliament.
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.
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 had not confirmed Reeves’ claim to have discovered a “£22bn fiscal black hole”.
Additional reporting by Ian Smith and Harriet Agnew
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