Physical Address

304 North Cardinal St.
Dorchester Center, MA 02124

UK budget: 7 things to watch for as Labour hikes taxes

LONDON — Rachel Reeves has wanted to run the Treasury for decades. Now, she has her moment in the spotlight.
Almost four months after entering office, the U.K.’s first female chancellor will present her debut tax-and-spend statement to the House of Commons on Wednesday at 12.30 p.m.
It’s the first fiscal event since Labour’s landslide election victory this summer — and the first for the party in almost 15 years. It’s inspiring feverish speculation about who exactly will be clobbered with tax hikes, where Labour will choose to boost public services, and how already-jittery markets will react.
The backdrop to the budget is a government already tanking in the polls — and facing questions over whether key planks of its budget plan risk shredding manifesto promises made months ago.
Make no mistake, this is a defining moment for Britain’s new government. POLITICO has a cut-out-and-keep list of seven things you need to watch for.
Labour made a solemn election promise not to increase income tax, national insurance or VAT. They said they would not hike taxes on “working people” — and there’s been endless speculation in recent days about just how far that definition will stretch without angering voters.
The Treasury is now almost certain to increase national insurance contributions paid by employers, while sparing employees themselves. Ministers insist this does not breach their manifesto commitment — but experts have warned that the changes could simply be passed on to workers and clobber small businesses.
Labour may also hike inheritance tax and capital gains tax, levies based on assets rather than income. Expect the party to continue a freeze on income tax brackets, meaning more individuals will be pulled into higher tax bands over time under a phenomenon known as “fiscal drag.”
Just how far Labour deviates from its “working people” pledge looks set to be the defining feature of this budget.
For all Reeves’ talk of fiscal restraint and tough decisions, the U.K.’s top finance minister has insisted Britain won’t see a fresh round of the austerity in public services that defined the Conservatives’ time in office.
Instead, they’ve promised £1.4 billion to help rebuild crumbling schools, a big expansion in government funded-childcare, and, most notably, extra cash for the struggling, state-funded National Health Service.
While Reeves will confirm the final NHS figure Wednesday, the Treasury has already promised £1.5 billion to help cut waiting lists and £70 million for new radiotherapy machines. The party has promised to deliver an extra 40,000 hospital appointments and procedures every week, although Health Secretary Wes Streeting is trying to temper expectations by telling voters the service’s woes won’t be fixed in a single budget. Health bosses say the amounts being talked about will keep things ticking over, but won’t be a game-changer.
The new government could also choose to hike defense spending. Labour agreed with the Tories that Britain’s defense spend needs to rise to 2.5 percent of GDP, but studiously avoided putting a date on that pledge. With Donald Trump eyeing the White House next week and urging NATO members to pull their weight, more detail could smooth the special relationship.
More broadly, polling suggests Brits don’t think the country’s public services are in good shape. The real test Wednesday will be whether a country that’s already heavily taxed by historical standards is willing to stump up extra funds to pay for them. 
Not every Cabinet minister will be left satisfied by Reeves’ pronouncements. Alongside the extra cash in key areas, the chancellor has made clear she wants government departments to make productivity and efficiency savings of 2 percent.
Overseen by a new Office for Value of Money, that ask could be hugely consequential given Whitehall has already spent years trying to trim the fat under the Tories.
Worried Cabinet ministers have already made their concerns known. Earlier this month, Housing Secretary Angela Rayner, Justice Secretary Shabana Mahmood and Transport Secretary Louise Haigh wrote to their boss Keir Starmer warning about the scale of cuts their departments are likely to face. Though all spending settlements have now been agreed, expect grumbling if a fresh cash-squeeze makes services outside the areas earmarked by Reeves worse.
One Labour MP, granted anonymity to speak frankly, said this year’s budget will be particularly important because the Conservatives did not conduct a full, multi-year spending review before the election. That means substantial costs, like promised compensation for victims of the infected blood scandal, still haven’t been allocated.
Starmer has long said that growth and wealth creation are key missions of his government. The PM has already held a big investment summit to try and drum up private sector cash, and wants Britain boasting the highest sustained growth in the G7.
However, this is all easier said than done. Reeves has promised to change Britain’s fiscal rules on how debt is calculated to open up to £50 billion in investment and borrowing for big infrastructure projects.
Watch out for significant infrastructure announcements, including movement on Britain’s beleaguered High Speed Rail 2 line, which will now go to central London (and possibly further than Birmingham) after the last government pared it back. Labour has also stressed the importance of green energy, with Reeves approving a host of carbon capture and storage sites in the north west and north east of England.
Beyond splashing investment cash, expect some Conservative opponents to ask where the government’s big supply-side ideas are to really spur growth.
Reeves has spent a long time talking about the perilous state of Britain’s public finances, accusing the Tories of leaving a £22 billion “black hole” of unfunded spending commitments. In a move that’s already got the Conservatives raging, Britain’s independent Office for Budget Responsibility watchdog is expected to publish a review into the potential withholding of departmental spending information by the last government.
The OBR’s analysis of Labour’s own plans — and the state of the British economy — will be published alongside the budget at 2.30 p.m., and will be closely watched by the markets to see just how credible the new government’s pitch is.
If Liz Truss’ brief tenure in Downing Street taught prime ministers anything, it’s that spooking the markets is a recipe for disaster. Truss’ ill-fated mini-budget — which wasn’t costed by the OBR and aimed to borrow to slash taxes on the wealthy and subsidize energy costs — precipitated market chaos as the pound fell to record lows and mortgage rates ratcheted up.
In a sign of just how closely-watched this budget is going to be, Reeves’ announcement last week that she’s tweaking Britain’s fiscal rules was swiftly followed by a rise in yields on British government bonds.
Labour has a huge majority, so there’s zero chance its budget gets into trouble in the House of Commons. But many of the party’s MPs — sitting on slim majorities — remain concerned about how long it could take Reeves’ tough medicine to actually benefit voters.
To give a measure of those jitters, consider the most controversial measure announced by the government before the budget — the removal of state winter fuel payments from all but the country’s poorest pensioners. Dozens of Labour MPs abstained in a parliamentary vote on the paring back of that social security cash. Increasing a cap on bus fares from £2 to £3 and ending a VAT break on private school fees may also cause headaches.
Though the next election is a long way off, Labour will be want to reverse sliding poll numbers which suggest the public are already unhappy with the direction of travel. Starmer’s personal ratings have already fallen precipitously since the party’s election victory.
Budgets often end with a surprise announcement meant to excite the party faithful and garner good headlines. So far, Labour’s insisting it’s above that kind of game-playing — but you never know.
The party has insisted no “rabbits” will emerge from hats.
Fuel duty, which has been held down for years by successive chancellors keen to side with motorists, is expected to rise by up to 7 pence per liter, according to pre-budget media briefing, but Reeves could opt for a lesser increase or keep it frozen to please campaigning tabloid newspapers.
For a real rabbit, Reeves could opt to abolish the country’s two-child limit on social security payments, a measure seen as deeply unjust by some Labour MPs. Given that the government has already taken a hard line with MPs resisting its tough stance on welfare, this one seems unlikely — but a bit of surprise fiscal headroom can go a long way.
Mason Boycott-Owen contributed to this report.

en_USEnglish