UK: Heavy tax hikes in Labour budget a godsend for opposition

Tax increases assumed, of 40 billion pounds (48 billion euros), against investments in public services at the end of their tether: the Labour government of Keir Starmer presented its first budget on Wednesday since coming to power in the United Kingdom in July, sharply criticized by the Conservatives.

It is the Chancellor of the Exchequer, Rachel Reeves, who has had the heavy task of assuming the government's choices in front of the House of Commons. A pivotal moment for Labour, whose popularity is already at its lowest.

“I have made my choices. Responsible choices,” she concluded after 1 hour 15 minutes of speech.

The former Conservative Prime Minister Rishi Sunak immediately denounced “a classic Labour programme: more taxes, more borrowing, no growth plan and workers paying the price”.

Among the tax increases unveiled, an increase in employer contributions, feared by businesses, which will bring in more than half of the new revenue: 25 billion pounds per year.

A measure decried even before its officialization by the opposition, which considers that it contravenes the Labour promise to spare “working people”, because they will end up paying the bill on their salaries.

Other sources of revenue and savings: the increase in capital gains tax or VAT on private schools, as well as the end of the energy voucher for millions of retirees, a highly contested choice, including among Labour.

The public budget forecasting body, the OBR, considers that the level of British taxation will increase from 36.4% of the GDP in 2024/2025 to 38.3% in 2027/2028, “a historic high”.

– “Absurd” –

“We need to restore economic stability and turn the page on the last 14 years,” said Rachel Reeves, targeting previous Conservative governments.

She again denounced a “black hole” of 22 billion pounds that she had inherited in public finances, and insisted on the enormous debt, at 100% of GDP.

“The only way to improve living standards and stimulate economic growth is to invest,” she hammered home, listing the billions planned for schools, housing and especially the NHS, the health system at the end of its tether, which will benefit from an additional 22.6 billion pounds by 2026.

British Prime Minister Keir Starmer speaks at an event in Birmingham, England, October 28, 2024 © POOL – Darren Staples

Rachel Reeves also pledged £100 billion in commitments over five years for public services and infrastructure, made possible by a forthcoming change to fiscal rules, an accounting twist to borrow more, but only to invest.

“The decision to let borrowing go makes complete nonsense of (Rachel Reeves') claims about the state of the public finances,” said former Prime Minister Rishi Sunak, leader of the Conservative opposition.

“If they were really in such a critical situation, as she said, we should have seen a significant reduction in borrowing today,” he added, describing her remarks about the Tories' “legacy” as “ridiculous.”

“This is a new government and it's natural to try to deliver all the bad news at the beginning,” said Laith Khalaf, an analyst at AJ Bell. But this budget is “bleak for taxpayers,” he adds, even though the tax increases are primarily borne by employers.

For Paul Johnson, director of the Institute for Fiscal Studies, the chancellor is making two risky bets: thinking that liquidity in public services “will be enough to turn things around” and hoping that the benefits from these investments “will offset the costs”.

The reaction of the markets to these tax increases and new borrowing will be scrutinized, in the wake of Rachel Reeves' intervention © AFP – HENRY NICHOLLS

The pound remained under pressure after these announcements, falling 0.1% against the dollar, penalized by the OBR's long-term growth forecasts: +1.1% this year, then +2% next year, up compared to the latest estimates, but slightly downgraded in the following years.

The British currency has however slowed its initial decline, thanks to smaller than expected tax increases.

In the wake of Ms Reeves' speech, UK 10-year borrowing rates climbed overall, temporarily rising to 4.41%, a high since early November 2023, before falling back.

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