Chancellor unveils £40bn of tax rises in first Budget

Chancellor Rachel Reeves unveiled £40bn of tax rises on Wednesday, as she used her long-awaited first Budget to launch a scathing attack the previous government’s fiscal record.

In the first UK Budget ever to be delivered by a woman, Reeves reiterated claims that the previous Conservative government had left a £22bn black hole in public finances. “The British people have inherited their failure,” she said.

In particular, Reeves said the Office for Budget Responsibility had confirmed it had not received “all the information” ahead of the last government's spring forecasts. The forecasts “would have been materially different” if it had, the fiscal watchdog had concluded.

Alongside the OBR’s review of the forecasts, the government said it would now publish its own “line-by-line” breakdown of the £22bn blackhole, which would include “hundreds” of unfunded pledges, Reeves said.

The previous government’s actions were “the height of irresponsibility and they know it," she added. "They had run out of road and they called an election to avoid making difficult choices.”

Rishi Sunak, former prime minister and leader of the opposition, hit back at the £22bn figure, arguing that the OBR had not referenced it. “It’s deeply disappointing that she has sought to politicise the independent OBR, that should be above party politics.”

In a Budget that had been widely trailed, both in Labour’s manifesto and via repeated leaks, Reeves said the government had been given “a mandate to restore stability to our economy and begin a decade of national renewal”.

She insisted she would not increase National Insurance, VAT or income tax for working people, a manifesto commitment. In one surprise move, she also pledged to uprate income tax and NI thresholds – which have been frozen since 2022, adding to the tax burden – in line with inflation from 2028/29.

However, employers’ NI contributions will to rise from 13.8% to 15%. The threshold at which businesses start paying will also be cut significantly, from £9,1000 to £5,000. The changes would raise around £25bn, Reeves said.

In addition, the lower rate of capital gains tax will rise from 10% to 18%, and the higher rate from 20% to 24%.

The nom-dom tax regime will be abolished from April 2025, while VAT will be added to private school fees from January 2025. Business rates relief will also be removed for private schools from April 2025.

The stamp duty land surcharge on second homes, meanwhile, will rise from Thursday to 5% from 2%.

As well as £40bn of tax rises, however, Reeves also detailed significant spending plans.

They included a commitment to fund HS2 into London Euston, investing £5bn in house building, new funding for schools and significantly boosting the NHS budget under a new 10-year plan. Day-to-say spending for the health service is set to rise by £26.1bn, while infrastructure spending will be boosted by £3.1bn.

Reeves also unveiled the OBR’s latest forecasts. The body expects CPI inflation to reach 2.5% in 2024 and 2.6% in 2025, before falling to 2.0% by 2029.

GDP growth, meanwhile, is forecast to reach 1.1% this year, rising to 2.0% next year before easing to 1.6% by 2029.

Reeves concluded: “The decisions I have taken today are the right choices. To restore stability to our public finances, to protect working people, to fix our NHS, to rebuild Britain.

“If the party opposite disagrees with the choices I have made, then they must answer, what choices would they make?”

TD Macro said: “It was a big spend, big tax, big borrow budget, with an overhaul of the government’s fiscal rules. But crucially, it contained few material surprises. OBR forecasts showed stronger near-term growth and inflation, but the growth impulse is entirely driven by public sector spending, with private sector growth weaker.

“At its core, the Budget threw out the old government’s fiscal rules, implementing new rules that favour bigger capital investments.”

Rain Newton-Smith, chief executive of the CBI, said: “A more balance approach to our fiscal rules, which prioritises capital investment, should help to unlock private sector investment in our infrastructure and net zero transition over the long-term.”

But she added: “This is a tough Budget for business. While the corporate tax roadmap will help create much needed stability, the hike in NIC alongside other increases to the employer cost base will increase the burden on business and hit the ability to invest.”

The corporate tax roadmap, published alongside the Budget, pledges to cap the headline rate of corporate tax at 25% and maintain the current capital allowances systems.

Market reaction to the Budget was modest. While the pound was slightly lower across the board, the FTSE 100 was largely unchanged.

Markets analyst Michael Hewson said: “There has been a modest market reaction, largely due to the fact that some of the worst-case scenarios have been avoided. However, some of the tax increases announced are still fairly significant, pushing the total tax take to a potentially historic high of 38% of GDP by the end of the decade.”