After 14 years out of government, the Labour Party has delivered its first Budget of the new Parliament, marking a significant shift in economic policy to the previous, as was to be expected. Chancellor Rachel Reeves has promised to avoid tax increases on “working people” while ensuring fiscal responsibility. However, the fine details reveal a complex balancing act between economic growth, revenue generation, and social investment. The majority of the measures announced are sensible, if not radical, designed to stabilise the economy and take the very first steps towards resumption of normality, taking on what is widely seen as one of the worst inheritances of any Government in post-Cold War Britain.
Prime Minister Keir Starmer acknowledged that the economic measures would be painful, reflecting this dismal inheritance. Upon taking office, Reeves conducted a full audit of the Treasury, uncovering a £22 billion in-year overspend by the previous Conservative government, an expenditure that had not been disclosed to Labour, Parliament, or even the Office for Budget Responsibility (OBR). Once you realise that Reeves and Starmer were expecting an extra £22 billion to be waiting for them in the Treasury, the headline measures make a little more sense, but are no less bitter to swallow.
Reeves’ fiscal rules dictate that the budget must be balanced and that debt must fall as a percentage of GDP by the fifth year of the forecast. These constraints limit Labour’s ability to introduce new spending measures without corresponding revenue increases. Despite these limitations, Reeves has ruled out a return to austerity, signalling a commitment to maintaining public service funding. Time will tell if her rules can be kept to or not, and any amount of “ironclad assurances” won’t preclude backsliding on these commitments if the global circumstances change (or, indeed, if Reeves turns out to be less competent that expected).
One of the most controversial aspects of the Budget is the increase in employer National Insurance (NI) contributions, rising from 13.8% to 15%. Additionally, the threshold at which employers begin paying NI has been lowered from £9,100 to £5,000. While this is technically a tax on businesses rather than employees, critics argue that companies may offset the cost through wage freezes or reductions. Perhaps typical socialist optimism caused Reeves to think companies may let their profit margins take a hit before workers’ quality of life became impacted, but the initial reaction seems to have show that optimism to be false.
While Reeves has committed to no direct rises in VAT, employee NI, or income tax, the decision to freeze income tax thresholds until 2028/29 means that as wages rise with inflation, more workers will be pushed into higher tax brackets, an effect known as “fiscal drag.” This will increase the tax burden on earners over time.
In contrast, Labour has implemented tax increases aimed at wealthier individuals and businesses, in line with its pledge to ensure those with the broadest shoulders bear the heaviest burden. Key changes include:
- Capital Gains Tax: The lower rate will rise from 10% to 18%, and the higher rate will increase from 20% to 24%.
- Air Passenger Duty: A 50% increase, but only for private jet users.
- VAT on Private Schools: Confirmed to go ahead.
- Abolition of Non-Dom Status: Ending tax advantages for wealthy individuals residing in the UK but claiming a foreign domicile.
Despite tight fiscal constraints, the Budget includes significant spending commitments on public services, something all too overlooked in the immediate criticism of this budget:
- £22.6 billion extra for the NHS, expected to reduce waiting lists by no small amount, a key issue at the election,
- £5 billion for housing development, contributing to the ambitious 1.5 million new houses goal,
- A freeze on fuel duty and a cut in draft duty for pubs.
- A state pension increase of 4.1%, in line with the triple lock commitment,
- A national living wage increase to £12.21 per hour, with plans to introduce a single adult rate over time,
The last one has also drawn ire from businesses and Tories alike, decrying the measure as another tax on businesses. Whilst it is true that small businesses will feel the impact of his policy more harshly, the majority effect will be an improvement of living standards for working people, those employed by larger companies and enterprises, who make up the bulk of the UK workforce.
The OBR has responded positively to Labour’s fiscal strategy, projecting that inflation will remain below 3% for the next five years and revising its economic growth forecast upwards for 2024-26. Government borrowing is also expected to decline over the next three years.
Despite the criticisms, Labour’s first Budget lays the groundwork for economic stabilization while attempting to shield workers from the harshest impacts of fiscal consolidation. It’s the first step on the way to fixing this nation of ours, not yet broken, but cracking and splitting at the seams. However, bolstering growth was also a central tenet of Labour’s election promises, as well as helping the most vulnerable in society. The hit to businesses this budget brings is not to be overlooked; I have friends who own and run small businesses who have cancelled hiring and growth plans due to these measures.
But, a Government must be judged on its performance at the end of its tenure, not just a few weeks in. I trust the plan, and I believe I’ll live to see these measures vindicated.
stay safe
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