UK Finance Minister Rachel Reeves to Unveil Higher Taxes and Increased Investment in Debut Budget
LONDON (Reuters) – The United Kingdom’s finance minister Rachel Reeves is preparing to chart a new economic course with her first budget, which is set to include significant increases in public spending and higher taxes. As Labour’s first budget in over 14 years, Reeves aims to address the nation’s economic challenges while balancing fiscal responsibility, mindful of avoiding the market turmoil caused by previous unfunded government initiatives.
Reeves, a former Bank of England economist, has emphasized that while investment is essential, she will ensure the country’s public debt does not spiral out of control. This is particularly relevant following the financial crisis sparked by former Prime Minister Liz Truss’ “mini-budget” in 2022, which included unfunded tax cuts that rattled bond markets.
The budget, set to be unveiled on Wednesday, will reveal how much Reeves and Prime Minister Keir Starmer plan to borrow for infrastructure investment and the extent of the tax hikes that will fund their public service pledges. Government sources indicate that the fiscal measures in the budget could total around £40 billion ($52 billion), with most of this figure generated by tax increases.
Tackling the UK’s Economic Challenges
The Labour government came to power with strong voter support in the July 2024 elections, driven by promises to address the country’s struggling public services. Overcrowded prisons, deteriorating public housing, and a strained National Health Service (NHS) are some of the key issues Reeves hopes to address. However, as the new budget approaches, Labour’s popularity has taken a hit due to warnings of painful economic measures and controversial cuts to fuel subsidies for pensioners.
Reeves has not ruled out tax hikes on businesses, with possible increases in social security contributions, capital gains taxes, and income tax rates. Some reports suggest that taxes on dividends, inheritance, and non-domiciled residents may also be targeted. While Reeves has promised to protect “working people” from the brunt of the tax increases, the government has warned that there may be little room to spare.
Amanda Tickel, global leader for tax and legal policy at Deloitte, commented on the public anticipation surrounding the budget: “We’ve never seen this level of interest in a budget. It’s a new government facing massive challenges, and this budget represents a significant departure from the past.”
Striking a Balance: More Taxes, More Investment
Despite plans for higher taxes, Reeves and Starmer also aim to relax the UK’s borrowing rules to boost investment in key sectors such as energy, transport, and digital infrastructure. The government hopes that by investing more in these areas, the UK will attract private investment and stimulate long-term economic growth.
Reeves has indicated that the government will change how it measures debt, a move that could give more flexibility for borrowing without breaking fiscal promises. The Guardian recently reported that Reeves plans to shift from the current measure of public sector net debt to public sector net financial liabilities. This shift, according to the Institute for Fiscal Studies, could have allowed an additional £53 billion ($69 billion) in borrowing under the previous budget rules.
Reeves is expected to use this new room for borrowing selectively, focusing on strategic investments in sectors such as clean energy, tech, and life sciences to drive economic growth. “We need to invest more to grow our economy and seize the huge opportunities in digital, in tech, in life sciences, and in clean energy,” Reeves said.
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However, there are concerns that increased borrowing could put pressure on interest rates. After reports of the planned rule changes, British government bond prices fell, reflecting market concerns about future borrowing and how it could affect Bank of England (BoE) interest rate decisions.
Political and Market Reactions
The budget is not only an economic test for Reeves but also a major political milestone for Labour. The Conservative opposition is already positioning the budget as a return to traditional “tax-and-spend” policies, warning that higher taxes could stifle business investment and economic growth.
Former Conservative finance minister Jeremy Hunt has cautioned that increased borrowing could keep interest rates higher for longer, which would hurt families with mortgages. “The markets are watching,” Hunt said on social media platform X, referencing the volatility seen during the Truss budget crisis.
Nevertheless, analysts like Ales Koutny, head of international rates at Vanguard, believe that Reeves is taking a more cautious approach compared to her predecessors. “This time around, it feels like the rhetoric is much more market-aware, which means we’re not as nervous about it,” Koutny noted.
With the debut budget, Rachel Reeves seeks to strike a careful balance between fiscal discipline and economic growth. How the public, businesses, and markets react will be crucial in determining the future trajectory of the UK economy and the Labour government’s political fortunes.
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