Rachel Reeves, the first female chancellor to deliver a UK Budget, has expanded the size and scope of the British state and ushered in a return of traditional left-right politics. Labour’s first Budget in over 14 years is likely to dampen wages, erode savings, increase inflation in the short-term, and leave GDP growth largely flat over the course of this parliament. However, Reeves’ plan redirects money from employers to public services, which many voters believe are broken after a decade of austerity.
Labour will raise taxes (by £40 billion) and borrow (by £30 billion) to fund new public spending (of £76 billion). Overall public spending will settle at 44% of GDP by the end of the decade, much closer to European than US norms. Reeves’ gamble was that an extra £100 billion in capital investment over five years would deliver enough growth for her not to have to raise taxes again soon.
The IMF backed her, but the Office for Budget Responsibility (OBR) says the return on that investment won’t come until the next parliament.
The UK’s biggest package of tax increases in a generation is the outline of the UK’s biggest package of tax increases in a generation. Reeves paid homage to the Labour budgets that “rebuilt” Britain in 1945, 1964, and 1997, and that of 2024 is certainly comparable in ambition.
Health will see an extra £22 billion a year for day-to-day NHS running costs, with another £3 billion for capital investment. Education will receive an extra £6.7 billion in capital funding for schools, including £1.4 billion to help rebuild hundreds of crumbling state school buildings. The National Living Wage will jump by an above-inflation 6.7% to £12.21 an hour.
However, the OBR says Reeves’ plan will boost growth “temporarily” but leave GDP largely unchanged in five years. It also warns of earnings “stalling” for two years as employers pass on the cost of higher National Insurance to employees, disposable income slowing sharply, households running down their savings, inflation increasing by 0.4%, and mortgages rising.
