Britain’s new government, led by Labor, has announced significant tax increases and increased borrowing for investment in a bid to pull the country out of a long period of economic stagnation.
Finance Minister Rachel Reeves introduced her first budget, and the first by a woman, in Parliament on Wednesday. In his 80-minute speech, Reeves announced tax increases of around 40 billion pounds ($51.8 billion), more than half of which would come from higher taxes paid by employers on workers’ wages. She also increased capital gains and inheritance taxes.
“The choices I made today were the right choices for our country,” Reeves said. “That doesn’t mean these choices are easy.”
The budget is Labor’s first major opportunity to set Britain’s economic policy after it won a majority in July’s general election after 14 years in power.
But the budget is seen as a moment of reset for Labor itself after a turbulent few months in office. Chancellor Keir Starmer said this week that the budget would “light the way” towards the government’s priorities of ensuring fiscal stability, improving public services and boosting investment.
Mr Reeves has warned for months that the budget would contain “difficult” choices, suggesting Britons must endure pain now for greater reward later. Officials said the choices would help the government achieve its aim of making Britain the fastest-growing economy in the G7.
Mr Reeves on Wednesday sought to show restraint on public spending despite pressure to pump even more money into Britain’s struggling public services. She announced more funding for teachers, defense and local government over the next few years. However, accounting for inflation, day-to-day spending in the government sector is expected to rise by 1.3% annually from 2026 onwards, leaving some sectors with very tight budgets, say analysts at the Institute for Fiscal Studies. It says that it will be.
At the same time, Mr. Reeves set out to reverse the downward trajectory of public spending. 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.
The Office for Budget Responsibility, an independent watchdog, said that, overall, Mr. Reeves’ measures would temporarily support the economy, but the size of the economy would remain “generally unchanged” over five years. The growth rate is expected to be slightly higher this year and next, but thereafter the growth rate is expected to slow to less than 2% annually. However, a sustained increase in public investment could increase the economy’s supply potential and foster long-term growth, the report said.
The budget comes less than a week before the US presidential election, which could disrupt the global economy. This is the first step in Labour’s efforts to transform the UK economy to make it more resilient in what Mr Reeves calls today’s “age of anxiety”.
Before taking office, she described her vision as “securonomics.” This means not only strengthening the finances of working people, but also emphasizing national security in economic decisions, such as investing in critical technology and climate change industries and entering into strategic trade partnerships.
“There are no shortcuts, and to make economic investment happen, we must restore economic stability and turn the page on the past 14 years,” Reeves said.
She accused the Tories of “economic irresponsibility” whose pre-election tax cuts and overspending had created a £22bn “black hole” in the public finances.
Mr Reeves has vowed to stick to strict fiscal rules to avoid a repeat of the economic turmoil that followed former chancellor Liz Truss’s “mini-budget” two years ago. Even if the government promises not to return to austerity, the day-to-day expenditures of government departments will have to be met from tax revenues.
Mr. Reeves also said he would change the debt measure to include government financial assets to ensure debt levels fall while easing further investment. Using this metric, the debt would be reduced within three years.
