UK Labour government tries to fight back with tax-raising budget

Britain’s centre-left Labour government sought to seize the political narrative Wednesday with a tax-raising budget that it hopes will boost economic growth, reduce child poverty and ease cost-of-living pressures.

But the budget’s contents were leaked half an hour before Treasury chief Rachel Reeves delivered the statement in the House of Commons, in a sign of the chaos that has engulfed the government during weeks of mixed messaging and political infighting.

The government was elected in a landslide victory in July 2024 on a promise not to raise taxes on income for working people. Reeves acknowledged some of the budget’s £26 billion (US$34 billion) in tax hikes, largely to increase the buffer available to the government for any future shocks, broke the spirit of that pledge and would face criticism.

But, she said, “I have yet to see a credible or a fairer alternative plan for working people”.

The biggest change in terms of money raised is freezing the thresholds at which earners pay Britain’s different income tax levels for a further three years from 2028, meaning as wages rise, more people fall into higher tax brackets.

Other measures included a mansion tax of over £2 million (US$2.6 million), changes to the capital gains tax regime, higher gambling taxes, a new levy on electric car use and a cut to tax-free provisions for private pensions.

She also announced measures to ease the financial pressure on households, including increasing the minimum wage, freezing rail fares for the first time in 30 years and cutting levies on household energy bills.

To applause from Labour lawmakers, Reeves got rid of a much-criticised restriction that had limited benefits paid out to families with one or two children. That decision will lift 450,000 children out of poverty, she said.

The budget was strikingly similar to Reeves’ first budget a little more than a year ago, even though she insisted at the time that it would be the only big tax-raising budget in this parliamentary term, which is due to run to 2029.

Unfortunately for Reeves, the United Kingdom’s economy, the world’s sixth largest, isn’t doing as well as she hoped, with many critics blaming her decision last year to slap taxes on business. Though there were signs that the economy was improving in the first half of the year, when it was the fastest-growing among the Group of Seven leading industrialised nations, it has faltered again.

False dawns have been a regular feature of the UK economy since the global financial crisis of 2008-2009. If the economy had kept growing at pre-crisis levels, it would be nearly a quarter bigger than it is now. That’s a lot of lost activity — and a lot of lost tax revenue going into Treasury coffers.

In addition to the long-term costs of the financial crisis, Britain’s public finances, like those of other nations, have been squeezed by the COVID-19 pandemic, the Russia-Ukraine war and US tariffs. The UK bears the extra burden of Brexit, which has knocked billions off the economy since the country left the European Union in 2020.

Meanwhile, Reeves has dealt with spending commitments aimed at easing the cost of living as inflation remains stubbornly high, including making up for a series of about-faces on planned welfare cuts.

Helen Miller, director of the Institute for Fiscal Studies, said Reeves should be commended for more than doubling the buffer available to the government to £22 billion.

“By providing greater insulation against economic turbulence, the additional buffer will reduce the risk of playing out this year on repeat in 2026,” she said.

In a sign that investor concerns have moderated, the interest rate charged on British government bonds fell, which if sustained should bolster the growth outlook.

AP