Chancellor Rachel Reeves pushed taxpayers to the bottom of her priority list as she delivered a Budget aimed at pleasing two key audiences: the international money markets and unruly Labour MPs.
The 404 Labour MPs flanking Reeves, who had been nervously eyeing their abysmal poll ratings and some of them plotting to remove Sir Keir Starmer, will be appeased by some of her choices. Reeves confirmed a new surcharge on properties valued at above £2 million – there are no tears spilt on the Labour benches for millionaires. And she ended the two-child benefit cap, with an impassioned section about her responsibilities as the first female Chancellor.
But, confronted with a £20bn productivity decrease predicted by the official forecaster, the Office for Budget Responsibility (OBR), she could have opted for spending reductions. Instead, she unveiled more than a dozen tax rises on workers, pensioners and savers while prioritising welfare spending, investment in the NHS and protecting low earners.
When those same Labour MPs go back to their constituencies this weekend they will have to explain why the ballooning welfare budget is being paid for by higher taxes. There was no mention by Reeves of a further push to bring down that specific bill.
Workers were the biggest losers on Wednesday, after the Chancellor extended a freeze on the income tax threshold for three years until 2030-31. This so-called “stealth tax” will turn one in four workers into higher-rate taxpayers, according to the Institute for Fiscal Studies (IFS). Where once the higher rate of taxation was preserved for the genuinely rich, it has now become the new normal.
Reeves also demonstrated an astonishing short-termist attitude when it came to taxing pension savers. She capped the amount a worker can pay into their pension via salary sacrifice at £2,000 a year from April 2029; after that, national insurance contributions kick in. That will slash tens of thousands off the value of retirement savings while simultaneously meaning the UK’s pension funds miss out on billions of pounds of investment, and therefore growth.
Gone are the incentives to save for private retirement even as the triple lock on state pensions becomes increasingly unaffordable. Meanwhile, the public sector’s inflation-proof pensions are protected. Labour MPs are going to have to explain that one away too. Landlords, savers and investors will also feel the pinch when the basic and higher rates of tax on dividends, savings and property rise by two per cent.
Winners include commuters, with rail fares frozen for the first time in 30 years and motorists will benefit from a freeze on fuel duty rates being extended by five months to September 2026, but at the expense of general taxation.
Reeves also pleased another constituency, the bond markets – who decide how much Government borrowing costs – by doubling the amount of “headroom” she has given herself in the budget from just under £10bn in March to £21.7bn. That wiggle room is the amount of “spare” cash the Chancellor leaves herself and is the difference between the Government’s planned tax income and spending in the final year of the forecast.
The need for Reeves’s considerable tax increases in this budget stems, in part, from her limited financial capacity in March, which was diminished by higher borrowing costs and the OBR’s productivity assessment. The larger £21.7bn headroom figure should mean that there is a lower risk she will have to come back for more in future budgets.
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The UK economy is now forecast to grow by 1.5 per cent on average this year, the OBR revealed, higher than the 1 per cent growth projected in March. However, forecasts for the next four years have been downgraded, with gross domestic product expected to increase by just 1.4 per cent next year, down from 1.6 per cent forecast in March.
Unless there is a sharp upward adjustment – unlikely given global uncertainty – voters are not going to feel the benefits of any growth as Labour edges towards an election in 2029. Lots of the big tax rises are due to kick in around the same time. She is gambling that by the time these tax rises are due to come into effect, the UK economic outlook will have improved, handing her the chance to either scrap the income tax freezes or offer other fiscal sweeties to voters.
Say that growth doesn’t come? Many of the tax rises she announced today will take effect at exactly the point that Labour is asking voters to give them another term in office. What could possibly go wrong?
The Labour MPs she temporarily pleased on Wednesday may then be joining the ranks of the unemployed.
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