LONDON (AP) — British Treasury chief Rachel Reeves told lawmakers Wednesday that taxes will rise by 40 billion pounds ($52 billion) to plug a hole in the public finances and provide new funding for the U.K.'s cash-starved public services, as she announced a budget that could set the economic tone for years to come.
In the Labour Party's first budget since regaining power after 14 years in July, Reeves also changed the U.K.'s debt rules — a move that will allow the government to borrow more to, as she explained, “invest, invest, invest.”
Her biggest cash commitment was an additional 25 billion pounds for the cherished National Health Service, which has seen waiting lists rise to record levels in the wake of the coronavirus pandemic.
“The choices that I have made today are the right choices for our country,” Reeves at the end of a statement that lasted almost 80 minutes. “To restore stability to our public finances. To protect working people. To fix our NHS. And to rebuild Britain.”
The overall increase in taxes, which is the biggest for over three decades, comes in large part from an increase in the tax businesses pay for employing people. Reeves said it was needed because of the economic “black hole” left by the previous Conservative government.
The overall tax burden is forecast to rise from 36.4% of the U.K's annual GDP in 2024/25, to a “historic high” of 38.3% in 2027/28, according to the independent Office for Budget Responsibility.
The biggest single tax increase — worth 25 billion pounds — is a rise of 1.2 percentage points in national insurance contributions paid by employers. The levy, which pays for benefits and helps fund the NHS, will remain unchanged for employees. Reeves insisted that many smaller businesses will not be affected as she doubled the salary threshold at which they start paying it.
Billions more will also come from increases in capital gains tax and closing loopholes in the way inherited money is taxed, while other revenues will come from increasing taxes on those who use private jets or send their children to fee-paying schools.
One tax that was surprisingly left unchanged was the levy that drivers pay at the gas pump, while taxes on most alcoholic drinks were increased — though a pint of draught beer or cider was cut by a penny.
Reeves used the increased tax income to raise spending for a number of departments, including education. Schools will get more money to create breakfast clubs and upgrade facilities.
She also set aside 11.8 billion pounds to compensate victims of an infected blood scandal in the 1970s and 1980s and 1.8 billion pounds to compensate victims of the Post Office Horizon scandal, in which hundreds of branch managers were wrongly convicted of theft and fraud as a result of a faulty computer system.
The center-left Labour party was elected July 4 after promising to end years of turmoil and scandal under Conservative governments, get Britain’s economy growing and restore frayed public services. But the scale of the measures announced on Wednesday by Reeves exceeded Labour's cautious general election campaign.
Reeves and Prime Minister Keir Starmer say they inherited an economy that was in a far more parlous state than they thought.
Reeves said her budget, which also included a big increase in borrowing, was needed to “fix the foundations” of an economy that it argues has been undermined by 14 years of Conservative government.
The Conservatives say they left an economy that was growing, albeit modestly, with debt trending lower.
During the election, Labour said it would not raise taxes on “working people” — a term whose definition has been hotly debated in the media for weeks. Though Reeves did not increase income tax or sales tax, the Conservatives said hiking taxes on employers was a breach of Labour's election promise and would lead to lower wages.
"Time and again, we Conservatives warned Labour would tax, borrow and spend far beyond what they were telling the country," said Rishi Sunak, the former prime minister who leads the Conservative Party — until his successor is announced on Saturday.
“And time and again, they denied they had such plans. But today, the truth has come out.”
Reeves — Britain’s first female chancellor of the exchequer in 800 years of the position — also said she is tweaking the government’s debt rules by accounting for assets as well as liabilities. The change will in effect free up billions more for investment in health, schools, transport and other big infrastructure projects, particularly in the transition to net zero.
Though the budget is arguably the most consequential since that delivered in 2010 in the wake of the global financial crisis, Reeves will have been careful not to cause concern in financial markets. Two years ago, the short-lived premiership of Liz Truss foundered after a series of unfunded tax cuts roiled financial markets and sent borrowing costs surging.
Early signs suggested some nervousness in the markets, with the interest rates charged on British government debt edging higher in the wake of Reeves' statement.
Part of the reason appears to be that big changes in tax and spend do not appear to be doing much to bolster the economy. The Office for Budget Responsibility, which provides the forecasts for the economy, said the economy will get a boost over the coming couple of years but that growth in subsequent years will be lower than previously thought.
Thomas Pope, deputy chief economist at the Institute for Government think tank, said the budget marked a “really big shift” from the previous government’s priorities, with “increases in investment spending, bigger spending on public services, and faster increases in taxes.”
“The proceeds of that tax revenue is going to be spent on public services, on investments that Rachel Reeves will hope, in five years at least, means that people feel better off come the next election than they do right now," he said.
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Associated Press video journalist Kwiyeon Ha contributed to this story,
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