British Finance Minister Rachel Reeves is set to steer the world’s sixth-largest economy and Prime Minister Keir Starmer’s government in a new direction next week, with significant increases in public spending and taxes.
This will be the Labour Party’s first budget in 14 years, concluding months of speculation regarding how much Reeves and Starmer will allocate for infrastructure investment and the extent of tax burdens.
Reeves, a former economist at the Bank of England, is determined to avoid excessive public debt, recalling the turmoil caused in the bond market two years ago by former Conservative Prime Minister Liz Truss’s unfunded tax cuts.
Her budget, scheduled for Wednesday, is expected to feature a range of revenue-raising measures, raising concerns among households and businesses already apprehensive about Labour’s plans to enhance worker protections.
“We’ve never seen this level of interest in a budget,” said Amanda Tickel, global leader for tax and legal policy at Deloitte. “It’s a new government facing significant challenges, which may require a broad approach. We anticipate a considerable shift from past practices.”
Voters turned to Labour in the July election primarily for its commitment to address public service issues, including overcrowded prisons, deteriorating public housing, and a strained health system.
However, Labour’s polling support has dipped due to the government’s warnings of a tough budget, alongside voter dissatisfaction over cuts to fuel subsidies for pensioners, particularly as Starmer faced scrutiny for accepting expensive gifts from donors.
Reeves is expected to propose around £40 billion ($52 billion) in fiscal measures, primarily through tax increases and cuts to certain public services, to fulfill her commitment to cover day-to-day spending without resorting to borrowing.
While Starmer has vowed to protect “working people,” Reeves hasn’t ruled out raising social security contributions from businesses—a move that could impact wages and hiring—or extending basic and higher income tax rates to more individuals.
Potential tax increases on capital gains, dividends, inheritances, non-domiciled residents, fuel, and possibly private pensions are also being considered, despite Britain already facing its highest tax burden since shortly after World War II.
**Increased Taxation Alongside Investment**
Alongside tightening tax policies, Reeves and Starmer are likely to ease the government’s self-imposed borrowing limits to boost investment. They aim to allocate more public funds to energy networks, transportation, and other infrastructure projects to attract the private investment necessary to fulfill their goal of making the UK the fastest-growing economy in the Group of Seven, even surpassing the United States.
“We need to invest more to grow our economy and seize the significant opportunities in digital, tech, life sciences, and clean energy,” Reeves stated on Thursday. “However, we can only achieve this if we revise how we measure debt.”
The Guardian reported on Wednesday that Reeves plans to shift the focus to a metric called public sector net financial liabilities, replacing the current target of public sector net debt.
Had this approach been implemented in the last budget in March, it would have allowed the then-Conservative government to borrow an additional £53 billion ($69 billion), according to the Institute for Fiscal Studies, a think tank.
Reeves confirmed that the rules would change, though she did not provide specifics. She stated that she would not utilize the entire additional borrowing capacity, but British government bond prices fell on Thursday as investors reacted to the possibility of increased borrowing and its potential impact on future interest rate cuts by the Bank of England.
Former Conservative Finance Minister Jeremy Hunt remarked that prolonged higher rates would negatively affect families with mortgages, noting, “The markets are watching,” on X.
Ales Koutny, head of international rates at Vanguard, the world’s second-largest asset manager, indicated that Reeves seems to recognize her constraints, especially following the turmoil caused by the Truss “mini-budget” crisis in 2022.
“This time, the rhetoric appears much more attuned to market realities, which makes us less anxious about it,” Koutny said.
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