By William Schomberg
LONDON (Reuters) – Britain’s new finance minister Rachel Reeves will announce what may be the biggest tax hikes in three decades on Wednesday in a bid to fix the country’s sagging public services, alongside billions of pounds of extra borrowing to overhaul the economy.
The Labour government is betting that its first budget after 14 years of Conservative rule can fund its election pledges without triggering the kind of bond market chaos that brought down former prime minister Liz Truss in 2022.
Labour promised voters it would cut long waiting lists in the state-run health service, build more housing and improve schools.
“It falls to this Labour Party, this Labour government, to rebuild Britain once again,” Reeves said in an excerpt of her budget speech shared with media on Tuesday.
Four months on from the election, Prime Minister Keir Starmer has said “those with the broadest shoulders” will have to pay more tax under the budget plan that Reeves will announce to parliament at around 1230 GMT.
Britain’s previous Conservative government left an undisclosed 22 billion pound hole in the public finances, Reeves has argued – a claim rejected by her predecessor Jeremy Hunt.
Companies face higher social security costs which, combined with planned new protections for workers and an increased minimum wage, could undermine Labour’s promises to turn Britain into the fastest-growing Group of Seven economy.
Polling firm Savanta said its measure of business optimism – like recent consumer confidence surveys – hit its lowest in October since Labour won power in July.
“Keir Starmer and Rachel Reeves will likely be concerned how quickly years of goodwill among businesses appears to have dissipated,” said Matt McGinn, a consultant at Savanta.
The richest Britons are also likely to face higher tax bills on capital gains, dividends, inheritances and wealth held abroad, pushing up further the country’s tax burden which is already the highest since shortly after World War Two.
Government sources have said Reeves plans around 40 billion pounds’ ($52 billion) worth of fiscal measures, mostly from tax increases, to meet her pledge to cover day-to-day spending.
According to the Institute for Fiscal Studies, a think-tank, tax hikes of 40 billion pounds would be equivalent to 1.25% of economic output, surpassed in recent history only in 1993 by Conservative budget plans which raised taxes to shore up the public finances after a recession and currency crisis.
BILLIONS IN BORROWING
As well as raising taxes to cover day-to-day spending, Reeves will try to reassure investors that an expected 20 billion-pound increase in borrowing for public investment will be positive for the world’s sixth-biggest economy.
“The only way to drive economic growth is to invest, invest, invest,” Reeves said in the speech excerpts. “There are no shortcuts. To deliver that investment we must restore economic stability.”
Reeves has said she plans to relax the government’s self-imposed fiscal rules to allow the kind of infrastructure investment needed to speed up growth.
A reported change in the rules could free up an extra 53 billion pounds ($69 billion) to borrow, prompting mild jitters in the debt market this month.
Bond dealers polled by Reuters expect government borrowing this financial year to rise to 105 billion pounds from a March estimate by the Office for Budget Responsibility of 87 billion pounds, requiring bond issuance to increase to 294 billion pounds, its second highest on record.
But bond strategists and fund managers say they are confident that Reeves – a former Bank of England economist – will not blow a Truss-style hole in the public finances.
Unlike in 2022, when Truss shocked already nervous financial markets with her tax cut plans, interest rates are coming down in the world’s rich economies, offering a bit more leeway for Reeves.
“While the new debt target may allow for more spending in the future, possibly in a second term, the government is likely to proceed cautiously, loosening policy only after establishing credibility or if market conditions change,” said Peder Beck-Friis, an economist with global bond investors PIMCO.
($1 = 0.7691 pounds)