Taxes, spending and borrowing soar as new Labor government seeks to ‘rebuild’ Britain

LONDON – British Treasury chief Rachel Reeves raised taxes by about 40 billion pounds ($52 billion) on Wednesday to close a hole she claims to have noticed in public finances and funding the UK’s deficit public services in a massive budget that could set the political tone for years to come.

In Labour’s first budget since returning to power after 14 years in July, Reeves also changed the UK’s debt rules – a move that will allow the government to borrow more to, as she explained, “invest, invest, invest”, but which the opposition figures described as “wandering through books”.

Its largest cash commitment was an additional £25 billion to the company respected National Health ServiceDue to the coronavirus pandemic, waiting lists have increased to record levels.

“The choices I made today are the right choices for our country,” Reeves said at the end of a statement that lasted nearly 80 minutes. “Restoring the sustainability of our public finances. To protect working people. To fix our NHS. And rebuild Britain.”

The overall tax increase, which is proportionally the largest in more than three decades, is largely due to increases in taxes paid by businesses to hire workers. Reeves said this was needed because of the economic “black hole” left by the previous Conservative government.

According to the independent Office for Budget Responsibility, the total tax burden will rise from 36.4% of the UK’s annual GDP in 2024/25 to a “historic high” of 38.3% in 2027/28.

The biggest single tax rise – worth £25 billion – is a 1.2 percentage point increase in employers’ National Insurance contributions, which will be paid on lower wages. The levy, which was originally intended to cover benefits and help fund the NHS but has actually been absorbed into overall tax receipts, will remain unchanged for workers. Reeves insisted many smaller businesses would not be affected because she had doubled the amount of relief that helps them offset their liabilities.

Billions more will come from increases in the capital gains tax and closing loopholes in the way inherited money is taxed, as well as raising taxes on people who use private jets or send their children to fee-paying schools.

One tax that was surprisingly left unchanged was the levy paid by drivers at the gas station, but taxes on alcoholic drinks were increased – although a pint of draft beer or cider was cut by a penny.

Reeves used some of the tax increases and additional borrowing to increase spending for many government departments, including education. Schools will receive more money to create breakfast clubs and upgrade facilities.

It also allocated £11.8 billion in compensation to the victims of the attack infected blood scandal in the 1970s and 1980s and £1.8 billion in compensation for victims of the so-called Horizon post office scandalin which hundreds of branch managers were wrongly convicted of theft and fraud caused by a faulty computer system.

The center-left Labor Party won approx a landslide electoral victory on July 4 after promising to end years of turmoil and scandal under successive Conservative governments, boost the British economy and restore frayed public services. But the scale of the measures announced by Reeves on Wednesday exceeded Labour’s cautious election campaign.

Reeves i Prime Minister Keir Starmer they say they inherited an economy that was in much worse shape than they thought.

Reeves said the budget measures she introduced were needed to “fix the fundamentals” of the economy, which she said had been undermined by conservatives. They insist that after the pandemic and soaring energy costs following Russia’s invasion of Ukraine, they have left an economy that is growing, albeit modestly, and are borrowing again.

During the election, Labor said it would not raise taxes on “working people” – a loose term whose definition has been hotly debated in the media for weeks. Although Reeves did not increase income or sales taxes, the Conservatives said increasing taxes on employers was a breach of Labor’s campaign promise and would lead to lower wages.

“At times we Conservatives have warned that Labor would tax, borrow and spend much more than the country was led to believe,” said Rishi Sunak, a Labor MP. former prime minister who leads the party until his successor is announced on Saturday.

“And time and time again they denied that they had such plans. But today the truth came out.”

Reeves – the first woman to be Britain’s chancellor of the exchequer since being appointed to the post 800 years ago – also said she was modifying the government’s debt rules by accounting for both assets and liabilities. This change will effectively free up billions more for investment in health care, schools, transport and other major infrastructure projects, particularly in the transition to net zero.

While the budget is likely to be the most important since 2010 in the wake of the global financial crisis, Reeves will be careful not to cause unrest in financial markets. Two years ago short-lived Prime Minister Liz Truss collapsed after a series of unfunded tax cuts that rocked financial markets and sent borrowing costs soaring.

Early signs suggested some nervousness in markets, with interest rates charged on British government debt rising following Reeves’ announcement.

One reason seems to be that big changes in taxes and spending don’t seem to do much to strengthen the economy. The Office for Budget Responsibility, which provides forecasts for the government, said the economy would see a recovery over the next few years, but that growth thereafter would be lower than previously thought.

Thomas Pope, deputy chief economist at the Institute for Government think tank, said the budget represents a “really big change,” particularly on taxes

“The proceeds from these tax revenues will be spent on public services and on investments that, at least five years from now, Rachel Reeves hopes will leave people feeling better off than they do now before the next election,” he said.

___

Associated Press video journalist Kwiyeon Ha contributed to this story: