UK’s Labour Government Hikes Taxes In First Budget

On Wednesday, Britain’s new Labour administration announced significant tax increases and increased borrowing to satisfy Prime Minister Keir Starmer’s goal of investing for long-term growth.

In the much-anticipated budget update, the first under the centre-left administration following 14 years of Conservative rule, finance minister Rachel Reeves said tax increases will raise an additional £40 billion ($52 million).

‘Invest’

Addressing parliament in a speech lasting more than one hour, Reeves also confirmed changes to fiscal rules that will allow the government to invest billions more in public services.

“This government was given a mandate,” Reeves told MPs.

“To restore stability to our country and to begin a decade of national renewal. The only way to drive economic growth is to invest, invest, invest,” she insisted.

Labour won a landslide general election in July and had already announced a raft of economic measures, including improved workers’ rights and minimum wages, a vast green-energy plan and plans for mass building of homes.

Ahead of the budget, it also drew strong criticism for scrapping a winter-fuel benefit scheme for millions of pensioners, hurting Starmer’s approval rating in polls.

“I am restoring stability to our public finances and rebuilding our public services,” Reeves said Wednesday.

Reeves said £25 billion would come from hiking employers’ national insurance — a payrolls tax used to help pay for social care.

The pound won back ground as Reeves spoke, while London’s stock market was little changed.

“At this stage, massive tax rises have not spooked financial markets”, said Kathleen Brooks, research director at traders XTB.

The government kept its pledge not to raise income taxes, employee national insurance charges, or value added tax.

Outgoing Tory leader Rishi Sunak, Britain’s former prime minister, said the budget contains “broken promise after broken promise”.

He accused the government of “delivering a tidal wave of anti-business regulations”.

Borrowing

Prior to her tax and spending plans, Reeves engineered a technical adjustment to the way UK debt is measured, allowing her to borrow more, despite the fact that the country’s public sector borrowing had reached levels not seen since the 1960s.

To encourage investment, the chancellor will utilize a broader definition of debt that considers future investment returns.

On Wednesday, Reeves stated that more investment in capital infrastructure projects would begin to “repair the fabric of our nation”.

The government plans to invest billions of pounds to repair schools, hire teachers, and fund childcare.

In an unexpected action, she extended the freeze on gasoline duties until next year.

The cash-strapped National Health Service will receive a substantial boost, with the day-to-day health budget receiving an increase of nearly £23 billion.

But there are costs to borrowing more, said Institute for Fiscal Studies director Paul Johnson.

“The challenge will be to make sure the money is spent well enough to make those costs worth bearing,” he said.

Economic growth

Along with the budget, Reeves predicted that Britain’s economy would develop faster than expected this year and next.

The nation’s GDP will grow by 1.1 percent in 2024 and 2.0 percent the following year, exceeding the Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, predictions in March.

Britain is benefiting from its annual inflation rate falling below the Bank of England’s 2.0 percent target, alleviating a cost-of-living issue.

This month, the International Monetary Fund predicted that the British economy would rise by 1.1 percent in 2024.

Looking beyond next year, the OBR on Wednesday lowered Britain’s growth predictions for 2026-2028.

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