Rachel Reeves delivered what can only be described as a Halloween horror of a budget this afternoon, announcing a staggering £40 billion increase in taxes, pushing tax levels to unprecedented highs. Reeves essentially conceded her financial ineptitude by stating that any chancellor would have done the same and that she had no other options. Contrary to her claims, it is not a universal approach among chancellors to believe that prosperity can be taxed into existence—this is a misconception largely held by Labour chancellors.
Reeves also perpetuated the falsehood of a dire inheritance from the Conservative government, despite the economy actually performing exceptionally well. 2024 was so far marked by low inflation and falling mortgage rates, contributing to a stable and growing financial environment. The economy was recognized as the fastest growing in the world, signifying robust health and promising future prospects.
Furthermore, Reeves continued to assert the existence of a fictitious £22 billion black hole in the economy—a claim not supported by the Office for Budget Responsibility, as it failed to appear in their report.
This budget, burdened with tax hikes and manipulative fiscal adjustments, starkly contradicts Labour's previous promises of economic prudence and growth-oriented governance. We have been misled.
Promises Versus Reality
All the promises made in Labour election campaigns were discarded this afternoon. Remember that promise that all the government’s plans were full costed? This budget unveils a starkly different narrative from Labour:
- Tax Increases on Working People: Defying earlier promises, the budget proposes significant hikes in Employer National Insurance Contributions, impacting every working citizen across the UK.
- Burgeoning Borrowing: Contrary to previous assertions against excessive borrowing, Labour now plans to augment borrowing by billions, threatening a return to inflation and to keep interest rates elevated and saddling future generations with hefty debts.
- Fiscal Rule Manipulations: Previously, Rachel Reeves criticized the notion of altering debt targets as "fiddling the figures." Yet, in an unsurprising move as she has been briefing the media bout this for weeks, the current budget does precisely that—easing fiscal safeguards and paving the way for an inflationary borrowing boom.
Budget Highlights and Economic Pitfalls
- Wage Policy Revisions: The budget suggests a 6.7% increase in the National Living Wage and a 16% rise for the National Minimum Wage among 18-20 year-olds, placing a heavy financial burden on small and medium-sized enterprises without any considerations as to how they will fund these unexpected increases in their day to day costs. The proposal to equalise the minimum wage across all the age groups completely overlooks the huge difference in knowledge and experience from people who are just joining the workforce. This is on top of the inflation busting pay rises already dished out to Labours union backers shortly after this government got power.
- Employer National insurance contributions: The chancellor announced an increase of 1.2% on employer national insurance contributions from April. The budget also reduces the secondary threshold when employers start paying NI contributions for employees from £9,100 a year to £5000. Reeves says that both these moves will raise £25 billion but in reality, this will suck £25 billion out of the cash flow of struggling businesses. This is nothing more than a tax on jobs and will reduce the amount that businesses have to invest. The measure will also make it less likely that businesses will want to employ people.
- Capital Gains Tax Hike: The lower rate sees a jump from 10% to 18%, with the higher rate escalating from 20% to 24%. Taxes on capital gains are lower because of the risks associated with investing hard earned capital. This move will effectively discourage investments and savings and will be a hammer blow to economic growth.
- Taxing Education: Starting in 2025, there will be significant financial changes impacting private schools. The government plans to implement Value Added Tax (VAT) on private school fees, adding a substantial cost for families choosing private education. Additionally, private schools will lose their business rates relief, further increasing the financial burden on these institutions. These measures are likely to raise the overall cost of private schooling, potentially affecting enrolment and the operational budgets of these schools. Many independent schools have already closed any many more will close over the next 12 months. Worse still, the policy wont raise any money and will actually cost money as thousands of children will have to join state schools.
- Inheritance Tax Stagnation: The plan extends threshold freezes and expands the tax to include inherited pensions by 2027, complicating financial legacies. The proposed reform to agricultural inheritance tax, effective from 2026, introduces a tax-free allowance on the first £1 million of a farm's value, with amounts over £1 million taxed at an effective rate of 20% after relief. This change could make it difficult for small family farms to stay within the family, as these farms may be asset-rich but cash-poor, potentially forcing heirs to sell parts of the farm to cover the tax bill.
- Stamp Duty Shock: The abrupt increase in the surcharge for second homes from 3% to 5% threatens to destabilize the property market and deter investment in property upgrades. Made even worse by the fact that this new measure will come into effect tomorrow without any warning. Funds that had been planned for new kitchens, bathrooms or gardens will now be used to pay this unexpected tax increases. This will affect small businesses and self-employed trades people.
- Increased Bus Fares: Single bus fares are set to rise from £2 to £3. This move will save a paltry £300 million and directly affect the poorest people in our society.
- Non-Dom Regime Overhaul: Abolishing this regime means non-doms will need to pay taxes on global income starting in 2025. The OBR have already said that abolishing this policy would end up costing the taxpayer money and underscores that this government is driven by envy and ideology as opposed to economic competence.
Broader Economic Implications
This budget has sparked significant criticism, not only for its immediate financial measures but also for its deep impact on economic confidence and growth.
- Underwhelming Growth Projections: With a growth forecast averaging a mere 1.5% over the next five years, the budget's capability to support Labour’s ambitious spending plans without further borrowing comes into question.
- Overall Economic Strategy: The narrative underpinning this budget suggests a premeditated strategy by Labour—prioritizing tax increases and aggressive borrowing over fostering economic stability and growth, a stark deviation from their campaign promises.
Market Reaction
The immediate feedback from the financial markets underscores the anxiety surrounding the budget's long-term implications. The borrowing costs on 10-year gilts have surged this afternoon, signalling investor concerns about the UK's fiscal health and the sustainability of its debt trajectory in light of increased borrowing. In simple terms, the markets are giving this budget a huge thumbs down.
Conclusion
At the core of this budget lies a stark reality: Keir Starmer and Rachel Reeves had always intended to raise taxes, increase borrowing, and break their promises—they just lacked the courage to tell the British public during the election, choosing instead to mislead everyone. This Labour government pledged to be the most growth-focused in living memory, yet today they have effectively declared war on businesses and aspiration. Consequently, the Office for Budget Responsibility (OBR) has downgraded Britain’s five-year growth forecasts. The Institute of Fiscal Studies has also stated that this budget clearly violates their election manifesto. This budget highlights a series of broken promises that challenge the integrity of Labour's mandate. With serious implications for the UK’s economic future, it not only creates uncertainty for businesses and working-class families but also risks long-term damage to the nation’s financial stability and growth prospects.