Rachel Reeves targeted Britain’s wealthiest families with a £26bn tax-hike budget to scrap the two-child benefit policy and cut energy bills.
On a chaotic day when key details of her budget were accidentally released early by the Office for Budget Responsibility (OBR), the Chancellor defended the measures, saying she was “asking everyone to contribute to repairing the public finances”, but that she wanted the richest people to pay the most.
Emphasizing that it has avoided reckless borrowing and dangerous cuts, the budget will take taxes to an all-time high of 38% of GDP in five years’ time.
More than 1.7 million workers will either be forced to pay tax for the first time or pushed into higher bands due to an extra three-year cap on income tax and National Insurance caps – Reeves acknowledged this would hurt “working people” but would bring in £12.4 billion by 2030–31.
Some Labor MPs privately expressed concern over the extent to which the budget would affect the so-called “pressed middle”, with more nurses, teachers and police officers also paying higher rates of tax.
Nearly one in four taxpayers, 24%, will pay higher or additional rates in five years’ time as a result of extending the border freeze, a process known as “fiscal drag”. The OBR said the border freeze would lead to an extra 780,000 people paying the basic rate of income tax; 920,000 if the higher rate is paid; And another 4,000 will have to pay an additional rate.
In a series of well-received measures, the Chancellor targeted the wealthy through a new council tax surcharge for properties worth more than £2m and announced a 2p tax rise on dividends, savings and income from property. Contributions to “salary sacrifice” pension schemes, on which employers pay no national insurance, will be capped at £2,000 from 2029 – leading to a significant contribution of £4.7 billion a year.
Reeves later told reporters that he did not believe he had broken the Labor manifesto with the threshold freeze. “If you read the manifesto, we’re very clear, we say ‘income tax, NI and VAT rates’, but if you’re asking whether there’s a cost to it for working people, I accept there is a cost,” she said.
The OBR said the tax cuts would hit living standards, with real disposable household income rising by just 0.25% a year over the projected period – less than expected in March.
Financial markets reacted positively as Reeves more than doubled the fiscal buffer left against his financial rules to £21.7bn from less than £10bn in his spring statement.
Yields on 10-year government bonds or gilts, which move in the opposite direction to prices, eased 0.07 percentage points to 4.41% by late Wednesday, pushing down government borrowing costs.
Labor MPs have praised the Chancellor’s decision to spend £3 billion a year on scrapping the controversial two-child benefit cap altogether, with the Government saying the move would lift 450,000 children out of poverty.
“I do not intend to preside over a status quo that punishes children for the circumstances of their birth,” the Chancellor said to applause from the Labor backbenches.
Reeves also promised to reduce inflation with a package of cost-of-living measures, including removing green subsidies from household energy bills and reducing rail fares.
The charge on energy bills will now be paid for from general taxation, which the Treasury said could reduce bills by an average of £150 a year from next April.
Labor MPs and ministers praised the budget as a shift to the left – saying it bought Keir Starmer and Reeves time away from a much-rumored leadership challenge.
A senior strategist said, “It shows we are a full-blooded Labor government. In an ideal world we would have wanted welfare to come first but that’s where we are. People want us to argue – so this is one. The richest pay more and we protect those most in need.”
But many others said the OBR shows that fundamental weakness in the economy remains – and that deep reservations about Starmer’s leadership will not be assuaged by this budget. One minister said, “It does nothing to advance fundamental principles.” “Yet there was an opportunity for adventure that yielded little.”
Another minister said: “This gives them a few months of purchase from the backbench and the bond market and further increases the hatred among my voters. But it delays the now inevitable reckoning.”
After newsletter promotion
Reeves also announced that the OBR will now evaluate it according to its fiscal rules only once a year, in the autumn budget – a change aimed at avoiding renewed instability. She was responding to weaker economic forecasts from the OBR, which now expects GDP growth to average 1.5% over the next five years – 0.3% slower than previously expected.
As well as the threshold freeze and mansion tax, other revenue raisers announced by Reeves include a £1.1bn increase in the tax on online gambling and a 3p-per-mile levy on electric vehicles. Rishi Sunak’s 5p cut in fuel duty was extended until next summer, but it will start rising from next September.
Gilt yields had begun falling even before Reeves stood in the House of Commons, as traders digested the OBR’s budget document, which was accidentally published on the watchdog’s website about 40 minutes before he was due to speak.
Jonas Goltermann, deputy chief markets economist at Capital Economics, said: “Gilt markets are taking a sigh of relief today after the UK’s highly anticipated budget announcement, which brought less bad news than feared and it appears the Chancellor has come out of a difficult fiscal process a little stronger so far.”
Some analysts highlighted the heavily backloaded nature of Reeves’s plans, however, as borrowing is set to be higher over the next three years, and large increases in taxes are scheduled for the end of the Parliament, to ensure he can meet his fiscal rule of covering day-to-day spending with taxes.
Helen Miller, director of the Institute for Fiscal Studies (IFS), said, “To finance the reduction in borrowing in later years and to meet that increase in ‘headroom’, the Chancellor is relying heavily on tax rises at the end of the Parliament.” “More borrowing for the next few years, then sharp adjustment. Spend now, pay later.”
“It’s one thing to promise debt reduction, and another to actually deliver.”
Ruth Curtis, chief executive of the Resolution Foundation, welcomed the moves to cut the cost of living but reiterated the IFS warning. He said, “This Budget leaves most of the fiscal repair work to 2028 and beyond. The economic winds could change dramatically between now and then. The Chancellor has made the sensible move to increase his room at the start of Parliament, but its impact will be felt at the end.”
Addressing MPs in Parliament on Wednesday night, Reeves warned them they would see a negative reaction on the front page of the newspaper – but told them it was up to them to sell the budget to voters.
He said, “Now, we have to win the argument, and we have to win the argument every day. We have to win the argument for the budget. We have to campaign on the budget – and that’s what we must do now.”
The Conservative leader, Kemi Badenoch, dismissed Reeves’ statement as a “benefits street budget”, accusing him of “making ordinary people pay for his incompetence and inability to stand up to Labour’s tax-hungry left-wing backbenchers”.
Moderate-left MPs said it was a victory for those who had spent time pushing the party to the left since the Kalyan rebellion. The revived Tribune group of MPs, which could provide a vehicle for a left-wing candidate in a future leadership contest, praised the Chancellor, calling it “a Labor budget that reflects Labor values”.
But in a warning it said the budget “should be the beginning of a broader program of modernisation. Future tax reforms should aim for simplicity, consistency and fairness – ensuring that hard work is rewarded, unearned income and wealth are taxed more consistently, and that people with broad shoulders continue to contribute proportionately to national renewal.”
<a href