The budget was highly anticipated as a “make or break” moment for Britain’s ruling Labor Party, which had struggled with poor polling the previous year. Earlier this year, a YouGov opinion poll found that if an election were held now, the far-right Reform UK party, which takes a tough stance on immigration, would come to power.
In an embarrassing twist, the country’s Office for Budget Responsibility (OBR) published its economic outlook as a result of the budget on its website two hours before the announcement – something it usually never does until much later. Reeves called the mistake “extremely disappointing” and a “serious error”.
Reeves acknowledged that the tax increase – in large part to be paid for by freezing existing income tax ranges, meaning more people will pay higher taxes as their incomes rise with inflation – will disproportionately affect working people. This breaks a key pledge made by Labor in its manifesto ahead of last year’s general election.
“We are asking everyone to contribute,” Reeves told parliament.
However, he said the tax increase would help free up about 22 billion pounds ($28.9 billion) of fiscal headroom within five years. Reeves also said that government borrowing will decline every year. Borrowing is expected to be 138.3 billion pounds ($183 billion) in 2025–26, falling to 112.1 billion pounds ($148.3 billion) the following year and 67.2 billion pounds ($88.9 billion) by 2031.
While the UK budget deficit for fiscal year 2026/2027 is projected to be 28.8 billion pounds, Reeves said this will turn into a surplus in 2028 and a 24.6 billion pound ($32.55) surplus is projected for 2030/2031.
This would pay for welfare spending and mean “no return to austerity measures”, Reeves said.
“I said there would be no return to austerity, and I meant it. This budget will sustain our investment in our economy and our National Health Service. I said I would cut the cost of living, and I meant it. This Budget will reduce inflation and provide immediate relief for families. I said I would cut debt and borrowing, and I meant it,” Reeves said.
Here are five key takeaways from this budget.
1. Labor broke its promise not to raise taxes for working people
Reeves raised taxes by about 40 billion pounds ($52.6 billion) in last year’s budget – the biggest increase in revenue-raising measures in decades – which he said would be needed once to get the government’s finances on an even keel.
This time, although he did not increase income tax or national insurance contributions for working people, he did raise the income threshold above which tax must be paid.
This means that as their income increases with inflation, more people will be dragged into higher tax brackets. The move will attract 780,000 more people to pay basic-rate income tax for the first time by the 2029-2030 financial year, along with 920,000 more higher-rate taxpayers and 4,000 additional-rate payers.
“This ‘fiscal constraint’ means thousands of people will start paying income tax for the first time, and all existing taxpayers will face higher liabilities,” said Irem Guseri, associate professor of economics and public policy at the Blavatnik School of Government at Oxford University.
The previous Conservative government had already put these limits on hold until 2028. Reeves, who was highly critical of that action at the time – saying it hurt working people – now plans to extend it until 2031.
“I know that maintaining these limits is a decision that will impact working people,” she said. “I said so last year, and now I’m not going to pretend otherwise.”
“I can confirm that I will not increase the basic, top or additional rates of National Insurance, income tax or VAT (value added tax),” the Chancellor said.
Reeves said she would also target the wealthy through a “mansion tax” on those who own more than 2 million pounds ($2.65 million) and reducing the amount of tax relief some higher earners get on pension contributions. He also announced a 2 percentage point increase in tax rates on rental income, dividends and capital gains.
Nigel Green, chief executive of financial advice firm Deavere, said the moves would have a wide-ranging “behavioral impact”. “People make long-term decisions about where to work, where to build wealth and where to retire,” he said.
“When the rules around pensions become increasingly stringent, it undermines confidence in the broader system. Wealth moves where governments have shown stability over decades, not sudden withdrawals,” he said.
Following the announcement, opposition Conservative Party leader Kemi Badenoch described Reeves’ decision to raise taxes, despite promising not to do so again, as an “absolute disgrace”.
2. Will spend money on labor welfare
One of the much-awaited announcements of the Budget was the abolition of the two-child benefit limit from April 2026. Currently, parents can claim a special tax credit of around £3,455 ($4,571) per child for their first two children. This limit was imposed by the previous Conservative government. Reeves said this would lift thousands of children out of poverty.
“Removing the two-child limit in child benefit is likely to provide significant assistance to families currently living in poverty,” Guseri said.
Experts said the move would appeal strongly to Labor Party backbenchers. “The two-child benefit limit is widely despised among rebel Labor MPs as a major contributor to child poverty,” said Colm Murphy, senior lecturer in British politics at Queen Mary University of London. “Repeal was vital to any possibility of Reeves’s political survival.”
Gregory Thwaites, research director at the Resolution Foundation (RF), a British think tank that focuses on improving living standards, also said the move was a positive step towards reducing child poverty in the UK.
“This is something we’ve been campaigning for in the RF for some time, and we’re very pleased to see it. And then there are also some welcome reforms to the tax system. So, for example, charging people with very expensive properties a little more money, that’s also very welcome,” Thwaites told Al Jazeera.
“Ultimately, budgetary responsibility should be seen not just in the context of fiscal balance but also in terms of measures of broader well-being,” said Professor Jasper Kenter, Professorial Research Fellow at Aberystwyth Business School. “Removing the two-child benefit limit is important in this regard.”
Gary Smith, general secretary of the GMB workers union, welcomed Reeves’ decision to tax wealth and increase welfare spending, describing the budget as “the final nail in the coffin for the Conservatives’ failed austerity project”.
A statement from Smith said, “Major public services, essential national infrastructure and communities across the UK were deeply wounded because the Tories made bad economic choices – we must never go back to those dark days.”
“The challenge for Labor is to take up the task of rebuilding our economy and country, making the investments needed for growth and starting to bring some hope back to people,” the statement said.
3. Britain’s disgusting ‘rape section’ will be abolished
Reeves said she would eliminate the so-called “rape clause”, which exempts women from the two-child benefit limit policy if they can prove that their child was conceived non-consensually.
He described the exemption requirement as “despicable, grotesque, inhumane, cruel”.
“I am proud to be Britain’s first female Chancellor,” Reeves told parliament. “I take the responsibilities that come with it seriously. I will no longer tolerate the vile disrespect towards women in the rape clause.”
4. Economic growth forecast to be slower than expected
In response to the budget, the OBR raised its forecast for economic growth for this year from 1 per cent to 1.5 per cent.
However, this reduced economic growth for the next four years. GDP growth in 2026 is now expected to be 1.4 per cent (down from 1.9 per cent), while the OBR has cut its forecast for each of 2027, 2028 and 2029 to 1.5 per cent (down from about 1.8 per cent).
Much of the decline is due to low expectations for productivity growth. However, Reeves insisted that the lax approach was a legacy of the previous Conservative government.
Guseri said Reeves also announced a freeze on fuel duty and rail fares, as well as support for energy bills, leading the OBR to reduce inflation by 0.4 percentage points for next year. However, the OBR has revised its forecast for this year to 3.5 per cent, “reflecting strong real wage growth and persistent food price pressures”, he said.
5. The pound and financial markets reacted positively
Sterling rose 0.3 percent against the dollar to $1.3213 just before the budget announcement, before falling back to roughly where it started from by the end.
London’s blue-chip FTSE index and the FTSE 250 index rose about 0.6 percent in the wake of the budget.
“So far, the market has shown very little reaction to the Budget – which the Chancellor will see as a success,” Guseri said.
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