What to expect in Rachel Reeves’ first Budget

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Chancellor Rachel Reeves will on Wednesday unveil a tax-and-spend Budget aimed at underpinning the Labour government’s push to repair the UK’s public finances and kick-start economic growth.

It will be a difficult sell. Reeves’ plan to increase taxes will, in the short term, hit jobs and squeeze millions of middle-income households, as well as affect wealthier people and businesses.

“There is a huge amount riding on this Budget,” said Ben Zaranko, economist at the Institute for Fiscal Studies, a think-tank. “The broad direction of travel is becoming clear: big tax increases to pay for extra spending on public services, and more borrowing to pay for the extra investment this government sees as central to its growth ambitions.”

Who will shoulder the burden of tax increases?

Despite the government’s promise that taxes will not rise for “working people”, the biggest Budget measure is expected to be an increase of up to £20bn in employers’ national insurance contributions — which will affect jobs, wages and consumer prices.

An anticipated extension of the existing six-year freeze on personal tax thresholds would affect people across the income distribution, who will find themselves paying tax on a higher proportion of their earnings — potentially raising upwards of £7bn a year for the Treasury.

Further revenue-raising measures will include the imposition of value added tax on private school fees, which is intended to raise £1.5bn for investment in state education, and more onerous taxation of the private equity industry.

The Treasury has also been working on reforms to raise more revenue from capital gains tax and inheritance tax as Prime Minister Sir Keir Starmer argues that those with the “broadest shoulders” should bear a heavier burden.

Will increased revenue for the Treasury improve public services?

Reeves has repeatedly promised not to return to austerity in her Budget, without defining exactly what she means.

But government officials close to the process have said improving public services and fixing the public finances will entail closing a funding gap of up to £40bn, largely through a package of tax rises.

The chancellor’s announcement will also outline a one-year budget settlement for government departments covering the fiscal year 2025-26, with officials pointing to the NHS as the key priority, while additionally setting the overall Whitehall spending envelope for the rest of the parliament.

A key question is how far Labour goes towards reversing a real-terms squeeze on the budgets of so-called unprotected departments, such as the Home Office and the justice and transport ministries.

Meanwhile, the Office for Budget Responsibility, the UK fiscal watchdog, will reveal the results of its review into a £22bn overspend that ministers said they discovered for the current fiscal year after Labour won the general election.

Officials have suggested the overspend will be an enduring problem in future years, adding to pressure on the public finances.

How much will public investment rise?

Reeves has promised she will open the way for the government to “invest, invest, invest” by reframing her fiscal rules in a way that would permit up to £50bn a year of extra borrowing for investment, while still putting debt on a downward path over five years.

This depends on adopting a broader measure of government debt, which includes financial assets such as student loans.

Meanwhile a second fiscal rule will specify tax revenues must cover day-to-day spending on public services — a strict constraint that is likely to bite hard.

In practice, Reeves will not risk unsettling gilt investors by using all this additional fiscal “headroom”.

Instead, she could seek to fund about £20bn a year of new investment through increased borrowing by the end of the five-year forecast window, with new oversight bodies put in place to ensure the money is well spent.

New capital spending will include an extra £1.5bn for new surgical hubs and scanners to help the NHS cut hospital waiting lists in England, and £1.4bn to rebuild schools.

Will the government be able to nurture higher growth?

The UK economy has grown faster than expected this year, prompting an upgraded forecast last week from the IMF, which now predicts an expansion of 1.1 per cent in 2024.

But economists said the outlook for growth in the near term looks soggy at best — even before factoring in the potential impact of new tax increases.

The IMF’s latest forecast is for growth of 1.5 per cent next year, well below the 1.9 per cent predicted by the OBR in March.

Catherine Mann, an external member of the Bank of England’s Monetary Policy Committee, said last week the freeze on personal tax thresholds had been a “significant drag” on growth and was one reason the UK’s prospects looked “pretty modest” even after the IMF upgrade.

Stephen Millard, deputy director at the National Institute of Economic and Social Research, an independent forecasting body, said it would be “quite difficult” for the OBR to show her policy changes having a positive effect on GDP growth within its five-year forecast horizon.

But the OBR is expected to report on the growth benefits of higher public investment beyond its five-year forecast.

Ministers will be hoping this supports a broader narrative: that the short-term pain in Reeves’ first Budget will lead to mounting economic benefits across a 10-year horizon and beyond.