Chancellor of the Exchequer Rachel Reeves presented Labour’s first budget on Wednesday, announcing an unprecedented £40 billion tax increase, the largest in three decades. Reeves highlighted the need to bridge fiscal gaps and jumpstart investment, positioning the tax hike as essential for revitalizing UK public services.
Tax and Fiscal Changes
Among the standout measures is a 1.2% increase in national insurance payroll tax for businesses, now set at 15% from April 2025, a step expected to generate £25 billion by the end of Parliament. Other fiscal shifts include the lifting of an income tax threshold freeze, maintaining the freeze on fuel duties, and new tax hikes on capital gains, tobacco, alcohol, and vaping products.
To further bolster fiscal flexibility, Reeves adjusted the government’s debt metric, switching to a measurement of public sector net financial liabilities and allowing up to £70 billion in new borrowing. She also adopted a three-year rolling timeframe for debt reduction targets, aimed at fostering long-term investments.
Market Reactions and Economic Context
UK bonds saw a surge, with 10-year yields dropping by 12 basis points, while the pound weakened to a one-week low of $1.2937. Domestic-focused stocks rose as gilt yields declined, with Barratt Redrow Plc leading the gains.
Key Tax Measures:
Balancing Priorities Amid Economic Strains
Reeves and Prime Minister Keir Starmer see the budget as a step to “rebuild” the UK, but it arrives at a time of declining consumer and business confidence. Public spending growth remains limited at 1.5%, sparking concerns from sectors anticipating more robust funding.
Paul Johnson, Director of the Institute for Fiscal Studies, described the budget’s tax measures as “very substantial,” adding that public spending allocations are “very tight.”
Labour’s First Budget Since 2010
As the first Labour budget since 2010, Reeves’ financial plan symbolizes the party’s ambitions to rejuvenate Britain’s institutions, including the NHS. Yet the budget’s market reception remains a critical indicator for Labour, particularly as Reeves strives to prevent market instability reminiscent of the 2022 mini-budget fallout.
Long-term impacts of Reeves’ budget decisions on austerity, growth, and fiscal stability will likely serve as a benchmark for Labour’s governance, as economists and businesses analyze the enduring effects of these sweeping fiscal changes.
