UK finance minister sets biggest tax hike since 1993 in first Labour budget

LONDON – Britain's new finance minister, Ms Rachel Reeves, announced the biggest tax increases in three decades in her first budget, as she accused the Conservatives of leaving public services broken when they lost July's election after 14 years in power.

Ms Reeves said she would raise taxes by £40 billion (S$68.9 billion) a year – much of it falling on businesses – to cover a £22 billion shortfall inherited by her Labour Party, the lack of compensation payments, including for victims of an infected blood scandal, and under-funding of public services.

"Any Chancellor (of the Exchequer) standing here today would face this reality," Ms Reeves said in her budget speech. 

"And any responsible Chancellor would take action. That is why today, I am restoring stability to our public finances and rebuilding our public service."

She has said she will not let public debt balloon, mindful of how former Conservative prime minister Liz Truss

sent the bond market into a tailspin two years ago

with unfunded tax cut plans.

Initial reaction to Ms Reeves’ speech suggested that investors were taking her plans well, with government bond prices rising further as she addressed parliament.

According to the Institute for Fiscal Studies think-tank, tax hikes of £40 billion would be equivalent to 1.25 per cent of economic output, surpassed in recent history only in 1993 by a budget plan under the Conservatives which raised taxes to shore up the public finances after a recession and currency crisis.

Ms Reeves said she would raise the rate of social security contributions paid by employers by 1.2 percentage points to 15 per cent from April next year, and lower a threshold at which firms start to pay it – moves which would raise an extra £25 billion a year in five years' time.

Company bosses have warned that higher taxes on them, combined with planned new protections for workers and an increased minimum wage, could undermine Labour's promises to turn Britain into the fastest-growing Group of Seven economy.

Ms Reeves announced a string of other revenue-raising moves, including changes to the tax rules on capital gains and inheritances and tax paid by private equity executives and non-domiciled residents.

Prime Minister Keir Starmer had warned “those with the broadest shoulders” will have to pay more tax.

But Ms Reeves ruled out making more individuals pay basic and higher income tax rates by extending a freeze on the threshold for payments beyond its scheduled expiry in the 2028/29 tax year. 

She also extended a freeze on fuel duty and a cut a tax on beer served in pubs.

Ms Reeves also said Britain's economy was forecast to grow by more than expected this year and in 2025, but by less than previously forecast in the following three years.

She is likely to announce changes to the government's budget rules to allow her to borrow more to invest in infrastructure and accelerate Britain's economic growth pace.

Bond strategists say they are confident that Ms Reeves – a former Bank of England economist – will be more cautious than Ms Truss, whose big tax-cut plans hammered British debt prices in 2022 and led to her resignation. REUTERS