By Andy Bruce and David Milliken, Reuters
Britain's main opposition Labour Party Shadow Chancellor of the Exchequer Rachel Reeves (R) listens to Britain's main opposition Labour Party leader Keir Starmer (L) speaking to members of staff during a Q&A session at the end of a visit of the Airbus Defence and Space facilities in Stevenage, north of London, on 28 May, 2024. Photo: AFP / Justin Tallis
British finance minister Rachel Reeves announced a big tax-raising budget that will take more money from workers, people saving for a pension and from investors to give herself greater room to meet her deficit-reduction targets.
Britain's fiscal watchdog cut its forecasts for economic growth for the coming years - a setback for struggling Prime Minister Keir Starmer who promised voters last year he would speed up the economy - and said spending was due to rise. But in a figure closely watched by investors assessing Britain's borrowing risks, the Office for Budget Responsibility (OBR) said the government will now have more than double its previous buffer for meeting its fiscal targets. The OBR - in forecasts published in error before Reeves began her annual tax and spending speech to parliament, and first reported by Reuters - said the tax hikes would amount to an annual 26.1 billion pounds (NZ$60.7 billion).
That will push Britain's tax-to-GDP ratio to 38.3 percent of economic output, a fresh post-war high, although this will still be lower than the euro zone's average of 41 percent last year.
In her first budget last year, Reeves ordered 40 billion pounds of tax hikes - the biggest since the 1990s - and she promised at the time that they would be a one-off. "No doubt, we will face opposition again. But I have yet to see a credible, or a fairer alternative plan for working people," Reeves said to cheers from Labour Party lawmakers, many of whom are likely to welcome her higher welfare spending.
Growth forecasts cut
The main spending measure was the removal of a two-child limit on welfare payments to poor families - a move popular with Labour lawmakers but lacking support among Britons as a whole.
Although Britain's next national election is not due until 2029, the authority of Reeves and Starmer has been questioned within their centre-left party.
The Institute for Fiscal Studies, a think tank, highlighted how the government planned to increase spending in the short term while much of the push to raise taxes would hit later on.
"The additional spending and borrowing in the short-term is readily believable. The future restraint, just before the next election? One could be forgiven for treating that with a healthy dose of scepticism," IFS director Helen Miller said.
The OBR cut its forecasts for growth in the UK economy which it now saw averaging 1.5 percent over the five-year forecast period, 0.3 percentage points slower than it expected in March.
The downgrade was linked to lower productivity growth which the OBR said reflected a long period of past underperformance due to headwinds including Brexit.
Reeves vowed to do better than the watchdog expected. "We beat the forecasts this year and we will beat them again," she told parliament.
Borrowing costs fall
British 30-year government bond yields - which are sensitive to concerns about higher borrowing - were sharply lower at 1515 GMT, down 7 basis points on the day, suggesting
investors were largely comfortable with the budget plan.
Sterling rose against the US dollar and the euro. The OBR said the headroom - the amount of extra spending or tax cuts possible for the government while staying within its budget rules - now stood at almost 21.7 billion pounds in four years' time. In March, the OBR had forecast headroom of 9.9 billion pounds, a historically low level which was eaten up by a downgrade of the country's economic outlook, higher-than-expected borrowing costs and a U-turn in July on welfare reform.
Ian Stewart, chief economist at Deloitte, said the OBR's assumption of faster wage growth had come to the rescue of Reeves as it would boost tax receipts.
"However, today's announcements will likely have a longer-term impact on growth, as the chancellor is raising an extra 26 billion pounds a year in tax," Stewart said. The OBR said a three-year extension of the freeze on income tax thresholds - which was first introduced by the previous Conservative government - would raise an extra 8.0 billion pounds in the 2029/30 financial year.
Reeves said in her first budget last year that she was returning stability to the public finances after the shocks delivered by Brexit, the coronavirus pandemic and the "mini-budget" crisis of former Conservative Prime Minister Liz Truss. This year, the generosity of pension incentives was scaled back with social security charges on salary-sacrifice pension contributions raising almost 5 billion pounds. Increasing tax rates on dividends, property and savings income would raise 2.1 billion pounds, the OBR said, while an annual tax on homes worth more than 2 million pounds (NZ$4.7 billion) was expected to raise 0.4 billion (NZ$0.9 billion) in 2029/30.
"Today's autumn budget marked the third-largest tax-raising budget since 2010," Sanjay Raja, chief UK economist, at Deutsche Bank said. "Put simply, while this year's budget paled in comparison to the chancellor's spending announcements from 2024, tax raising measures were indeed historic."
Reeves maintained a freeze on the rate of fuel duty dating back to 2011 but she introduced a new mileage-based charge on electric cars.
Spending up, growth down
Public spending was due to grow every year as a result of the measures in the budget - reaching an extra 11 billion pounds (NZ$25.6 billion) in 2029/30 - primarily to pay for the welfare measures.
A think tank that focuses on poverty reduction welcomed the removal of the two-child cap, along with actions to lower energy bills and an increase in the minimum wage.
"But there is more to do," Alfie Stirling, insight and policy director at the Joseph Rowntree Foundation said. "Housing costs and bills are still too high, our safety nets are too frail, and the cost to workers of caring for their loved ones is too great."
- Reuters
