Reeves announces £40 billion tax hike, hints at more increases

Rachel Reeves has signalled that her initial £40 billion tax increase on businesses and the middle class may be just the beginning, as she declined to rule out further tax hikes. In a surprising Budget announcement, the Chancellor has shifted the UK towards a high-tax, high-spending model reminiscent of some European countries. The extent of the tax raises, which surpass the £8 billion outlined in Labour’s manifesto and are greater than anticipated, caught many in Westminster off guard.

The new tax burden will reach 38.3% of GDP, reminiscent of Norman Lamont’s heavy tax increase in 1993. Reeves insists that voters chose change and it’s time to rebuild, promising to increase annual spending by roughly £70 billion over the next five years. In evening interviews, she stated it would be irresponsible to promise never to change taxes again, describing her Budget as a one-time reset to address the “mess” left by the Conservatives.

Reeves dismissed comparisons with Jeremy Corbyn’s £80 billion tax proposal from 2019. The Office for Budget Responsibility (OBR) has reacted by lowering growth and wage forecasts, warning of prolonged inflation that could delay interest rate cuts. Real earnings are expected to drop in 2026 due to the Budget, despite promises to support workers.

CONFIRMED: #RobbingReeves announces £40bn worth of tax hikes.

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Biggest tax raising budget in history in cash terms.

Agricultural Relief ❌️ Gone.
Investment Allowances in the North Sea, 🛑 Ending.

Classic Labour – committing to record tax hikes on working people. #VoteReformUK pic.twitter.com/yjckPmDPBV

— Alastair Redman (@AlastairRedman) October 30, 2024

There’s concern as government borrowing rules were adjusted to allow up to £50 billion more for investments, causing market interest rates to rise. The Institute for Fiscal Studies (IFS) expressed worry about the government’s reliance on improving productivity, suggesting more taxes could be necessary.

Businesses have reacted strongly, with a £25 billion national insurance increase on employers, largely affecting workers. Changes to capital gains tax and inheritance tax are expected to raise £2.5 billion and £2 billion, respectively, while stamp duty for second home buyers will increase.

Despite these measures, fuel duty will remain frozen for another year, and tax threshold freezes will conclude in 2028. In presenting her Budget, Reeves became the first female Chancellor in 14 years. She has committed to one annual Budget, noting it would be irresponsible to guarantee no future tax changes.

Reeves assured no national insurance, income tax, or VAT increases for workers during this Parliament but did not rule out further hikes on employers. She criticized the Conservatives for leaving public services underfunded, with ex-PM Rishi Sunak accusing her of misrepresenting figures due to generous public sector pay deals. She claims the OBR found hidden pressures on finances, necessitating the tax increases.

During her Budget speech, Reeves expressed pride in being the first female Chancellor and emphasized Labour’s historical role in rebuilding after WWII. Keir Starmer described the day as significant for Britain. Despite the difficulties, Reeves highlighted a 6.7% minimum wage increase as a positive outcome.

Karen MacDonald, an organic skincare shop owner, is contemplating going online due to reduced business rate relief. Her store, Blomma Beauty, which opened in 2021 in London’s King’s Cross, now faces increased costs. Under Conservative rule, she received a 75% discount on £9,000 business rates, but this has been reduced to 40%, adding £3,150 in expenses. Combined with higher national insurance for her ten employees, closing her physical shop may be unavoidable. MacDonald, who pays herself £7 an hour, fears redundancies if she moves online. Rising costs have already made her consider shutting down the store, expressing frustration over the lack of incentives for small businesses.

Reeves stated that economic growth requires investment, warning against shortcuts. She outlined the severity of the financial situation, citing a recurring public finance deficit and unfunded compensation payments. She plans to raise taxes by £40 billion to stabilize finances and improve public services.

On inheritance tax, Reeves noted that only 6% of estates will pay it this year. She plans to extend the current freeze on thresholds until 2030, with a £325,000 tax-free allowance, increasing to £500,000 for residences passed to direct descendants. From April 2026, inheritance tax will apply to assets over £1 million with a 50% relief rate.

Paul Johnson of the IFS remarked on the anticipated Budget’s large tax hikes, increased public service funding, and more borrowing. He noted two major risks: the sufficiency of a cash injection for public services and the potential need for more taxes if spending pressures persist. The second risk concerns whether extra borrowing will be beneficial. The Government plans to increase borrowing significantly over the next four years, contingent on effective spending.

"Any chancellor standing here today would have to face this reality and any responsible chancellor would take action"

UK Chancellor of the Exchequer Rachel Reeves says her budget will raise taxes by £40 billion https://t.co/cyVsaScHbh pic.twitter.com/eS8oQpMPjl

— Bloomberg (@business) October 30, 2024

The OBR warns that the Budget could exacerbate inflation and impede growth, affecting mortgage costs. They predict the Bank of England will maintain higher interest rates, increasing loan servicing costs. Although GDP growth is expected to rise next year, it may drop below 2% by Labour’s term end.

Becky Lumsden, owner of 23 beauty spas, called the Budget an “extinction-level event” due to a £300,000 staffing cost increase. The Edinburgh businesswoman, employing 200 people, finds it unaffordable and plans operational changes. She criticized National Insurance hikes and minimum wage increases but hopes to avoid layoffs by reassigning staff.

The Budget’s impact on mortgages is dire, with anticipated falls in real earnings by 2026 as national insurance increases are passed to workers. The OBR revised GDP growth forecasts for the coming years, with a significant downgrade for 2028. They predict Budget policies will boost short-term output but not long-term GDP.

The OBR also notes that the Budget policies could slow deficit reduction, with borrowing expected to climb significantly in the coming years. Charlie Mullins, founder of Pimlico Plumbers, criticized the Budget for burdening businesses while promising more public spending.

The NHS will receive significant funding to address its challenges. Reeves announced £1.5 billion for surgical hubs and scanners, £70 million for radiotherapy machines, and £1.8 billion for elective appointments. The Treasury aims to invest heavily in technology for healthcare productivity.

Lawrence Barton, a Birmingham bar owner, described the Budget as a “dark day” for hospitality, with increased staffing costs threatening business viability. With three bars and 100 employees, he anticipates significant job losses due to rising costs and low revenue.

The Government’s proposed NHS reform includes a focus on community-based healthcare and preventive measures, alongside technology-driven productivity improvements.

The National Living Wage will rise to £12.21 per hour next April, benefiting over three million workers. The increase aligns with Labour’s goal of a single adult wage rate. The changes follow Labour’s directive to the Low Pay Commission to consider living costs.

Reeves has increased stamp duty for buy-to-let landlords and holiday home buyers, with a 5% surcharge. The move aims to help other homeowners but may lead to higher rents. The Government did not extend the stamp duty discount, potentially raising revenues by £1.8 billion annually by 2029-30.

Reeves talked about £40 bn of tax increases but that's just the direct impact – total difference compared to March including indirect effects is £52 billion in last year of forecast. pic.twitter.com/4qWTGEVsG6

— Neil O'Brien (@NeilDotObrien) October 30, 2024

Millions face higher travel costs as Labour raises the bus fare cap from £2 to £3. The current cap, set to expire, will be replaced by a new cap until 2025’s end, drawing criticism for impacting lower-paid workers.

Private schools will lose VAT exemptions from January 2025, with business rate relief ending in April 2025. The move is expected to finance additional state school teachers but may reduce student numbers at fee-paying schools.

Reeves plans to cut draught duty by 1.7%, reducing pub pint costs, but other alcohol prices may rise. Despite criticisms of her Budget, Reeves focuses on rectifying public finance issues and investing in the country’s future.