RACHEL REEVES’ FIRST BUDGET ARRIVES at a very peculiar moment for Britain, as we wrote in our editorial last night. Growth is weak, public services are visibly fraying, and yet the tax burden is already higher than at any point in modern history. Into that context she has introduced a package that raises taxes by roughly £26 billion a year by 2029 to 2030 and pushes the overall tax take to around 38 per cent of GDP by the early 2030s, the highest level for decades. The Chancellor calls this “tough but fair” and insists it is the only honest way to repair the state. The more uncomfortable truth is that Britain is drifting into the world of permanently higher taxation without anything close to a convincing story about how its underlying growth problem will be solved.
The immediate backdrop to this Budget is not a financial crisis but something more insidious: a sense of slow suffocation. Official forecasts now show average GDP growth over the next five years of around one and a half per cent a year, slightly lower than previously expected because productivity has once again been revised down. Borrowing was expected to fall gradually as pandemic support rolled off, yet the pre Budget numbers already pointed to a softer fiscal position and a thinner current budget surplus later in the decade. Reeves has chosen to respond not with sweeping spending cuts but with a front loaded increase in spending combined with tax rises that grow steadily and are fully felt only at the end of the forecast period. That choice reveals Labour’s core fiscal instinct: avoid a repeat of overt austerity, but lean heavily on the tax system to make the numbers add up.
“The more uncomfortable truth is that Britain is becoming a systematically higher tax economy without a convincing story about how its underlying growth problem will be solved.”
Politically, the Budget has already been coloured by the extraordinary leak from the fiscal watchdog which accidentally published its full economic and fiscal outlook before the Chancellor even stood up. That document laid out in black and white the scale and profile of the tax rises. Instead of the government controlling the narrative about cutting waiting lists and easing the cost of living, the story was effectively settled in advance: this is a tax raising Budget on a historic scale. That kind of framing is hard to dislodge, and it fed into an immediate perception that whatever the rhetoric about fairness and growth, the central fact is that almost everyone will be paying more.
At the heart of the package sits a deceptively simple instrument that does much of the revenue work: the freeze on income tax thresholds. Personal allowances and higher rate thresholds are now planned to remain fixed in cash terms until 2030 to 2031. With wages rising in nominal terms, that means millions more people will be dragged into paying income tax and millions more into the higher rate. By the end of the period this is expected to raise in the region of £12 to £13 billion a year compared with a world where thresholds rise in line with prices. This is classic fiscal drag. It is also the tax rise that is hardest to see and easiest to deny, which is precisely why governments like it. For a party that celebrates helping “working people”, freezing thresholds for such an extended period is a quietly brutal policy.
Alongside this large but hidden move, the Budget raises a series of more visible taxes on capital and non wage income. Dividend tax rates go up, tax on income from property and savings rises, and a clampdown on salary sacrifice pension contributions means that from 2029 employer pension contributions above £2,000 a year through these schemes will attract National Insurance. These changes are presented as an attempt to ensure that those with the broadest shoulders contribute more, since they fall most heavily on landlords, investors and higher paid employees with generous pension arrangements. Behind that framing lies a more awkward reality. Higher tax on savings and pensions risks discouraging long term saving, while better off taxpayers are also the best placed to rearrange their affairs, so part of the yield may be whittled away by avoidance and behavioural change.
One of the most eye catching elements, politically if not fiscally, is the so called mansion tax. From 2028, properties worth more than £2 million in England will face an additional council tax surcharge. The government says this will hit fewer than one per cent of homes and will eventually bring in only a few hundred million pounds a year, a tiny sum set against the £26 billion consolidation. As a revenue raiser it is almost trivial. Symbolically, however, it is important. Council tax in England is still based on values from the early 1990s, which creates situations where a modest house in one town can attract a similar or higher bill than a multi million pound property in London. The surcharge is a clumsy first step towards confronting that absurdity. It will mean a complicated revaluation exercise, a surge in disputes over valuations, and probably some reorganisation of ownership structures, but it at least acknowledges that the property tax system at the top end has been indefensible for a long time.
“The immediate backdrop to this Budget is not one of crisis in the markets but of slow suffocation.”
The Budget also begins the slow, politically fraught process of replacing fuel duty in an era of electric vehicles. From April 2028 electric cars will pay a mileage based charge, with electric vehicles and plug in hybrids paying per mile rates that are deliberately set at around half the implied per mile tax burden on petrol cars. In the long run, when the vehicle fleet is largely electric, this is projected to raise several billion a year and to become one of the largest single revenue measures. Conceptually, taxing road use instead of fuel consumption is the right direction of travel. In practice the government has chosen the most cautious and least imaginative version of that idea. The new charge barely reflects congestion, does not differentiate between busy urban roads and quiet rural ones, and risks sending a negative signal about the economics of switching to an electric car at precisely the moment the state claims to be encouraging that switch. It feels like the Treasury is patching a revenue hole rather than designing a new system.
If the revenue side of the Budget is dominated by stealth and incremental change, the welfare side contains one decision that is both morally weighty and economically significant. The abolition of the two child limit in Universal Credit from April 2026 reverses one of the most controversial policies of the post 2010 welfare settlement. By preventing support for third and subsequent children in many low income families, the cap had become a major driver of child poverty, especially in larger households and in some minority communities. Scrapping it is expected to cost in the region of £3 billion a year by the end of the forecast period and to lift hundreds of thousands of children out of poverty or deep poverty. That is a substantial commitment by any measure, and it marks a clear ideological break with the idea that the welfare system should deliberately punish family size. It is arguably the single most progressive aspect of the entire Budget.
Alongside that headline welfare reform sit a number of measures aimed at easing the cost of living for specific groups. Planned restrictions on winter fuel payments are abandoned. Benefits are uprated in line with inflation. Environmental levies are shifted off household energy bills and onto general taxation, which the government claims will reduce bills for a typical household by around one hundred and fifty pounds next year. Regulated rail fares are frozen, a symbolic move in a country where yearly fare hikes have become a ritual of public frustration. Taken together these policies are meant to demonstrate that the government is not only balancing spreadsheets but also responding to the lived realities of people who have endured a decade of stagnant wages and repeated price shocks. The risk, however, is that these targeted gestures are swallowed by the broader effect of threshold freezes and higher taxes on consumption and income.
“This is a serious Budget in fiscal terms and a bold one in distributional terms, but it is not a transformative Budget for growth.”
On public services, the picture is far less bold. There is extra money for NHS technology, for local transport and for small pockets of infrastructure. There are repeated commitments to bring down waiting lists and improve outcomes. Yet when one looks beneath the announcements, departmental spending plans remain tight. Real terms growth in day to day spending is set at modest levels, and the path of borrowing actually rises in the near term compared with previous plans before falling later, which implies that much of the serious discipline has been pushed to the post 2028 period. That is convenient politically but fragile economically. Governments are very good at promising that the belt will be tightened after the next election and much worse at actually doing it when the time comes.
Reeves points to her fiscal rules and the headroom against them as proof of prudence. On paper, the main rule that public sector net debt should be falling as a share of GDP in five years’ time is met with more breathing space than under her predecessors. The current budget is forecast to move into surplus later in the decade, and the Chancellor can claim a buffer of over twenty billion pounds by the target year. Yet those numbers rely on the assumption that every one of the planned tax rises is implemented and maintained, that there is no serious growth disappointment, and that departments will deliver efficiency savings without major political pushback. This turns the fiscal framework into a storyline about credibility rather than a hard binding constraint that shapes choices. It reassures markets, but it does not guarantee discipline.
Stepping back, the Budget sets out a fairly clear model for the British state. The country will accept a permanently higher tax burden, closer to that of many continental European economies, in return for a slightly more generous welfare system and an attempt to stabilise public services. Around three quarters of the planned reduction in borrowing over the medium term is due to higher taxes rather than lower spending. That is a significant break with the post 2010 era in which consolidation fell heavily on departmental budgets. The unanswered question is whether a state that has grown incrementally in this way can ever deliver the quality of services and infrastructure associated with high tax countries that made a deliberate, strategic leap decades ago.
“From a tax design perspective, the Budget also fails a basic test of simplicity.”
The distributional story looks neat on a Treasury slide but is more ambiguous in the real world. On one side, low income families with children, particularly larger families, gain significantly from the abolition of the two child cap and from more generous support in certain areas. On another, very wealthy households with multi million pound properties, large dividend streams or aggressive pension tax planning lose more through the mansion surcharge, higher capital taxes and new restrictions. The narrative of “those with the broadest shoulders” is therefore not baseless. However, in the middle sits a large group of ordinary workers and professionals who will see their tax bills rise year after year simply because thresholds do not move. These are teachers, nurses, mid level managers and skilled tradespeople who may not feel remotely wealthy but will quietly be pulled deeper into higher rates of tax.
There is also an important intergenerational dimension that the Budget only partially confronts. The threshold freeze means that more pensioners will move into the tax net over time as the state pension rises in cash terms. The clampdown on salary sacrifice pension contributions hits younger and middle aged workers who are still building up retirement savings. At the same time, the triple lock on the state pension and other protections remain in place, preserving a relatively favourable position for many current retirees compared with younger households facing higher housing costs, student debt and a more precarious labour market. While some correction of pensioner tax advantages is justified, there is a risk that younger cohorts perceive the whole package as yet another example of them paying more, both now and later, without a clear payoff.
From the perspective of growth, the criticism is blunt. This Budget does not set out a transformative agenda to raise productivity. There are some worthy but limited measures on infrastructure, on planning for strategic projects and on capital markets, yet nothing like the kind of wholesale planning reform, regulatory overhaul or industrial strategy that many economists think is required. At the same time, raising the overall tax burden when productivity is already weak carries its own risks. Higher taxes on income, investment and property can depress risk taking and inward investment at the margin. A country that has spent more than a decade stuck in a low productivity, low investment equilibrium might reasonably have hoped for a more aggressive pro growth tilt.
From a tax design standpoint, the package also reflects the worst habit of British fiscal policy: layering small, targeted tweaks on top of an already convoluted system. Instead of a clean shift to a broader base with lower headline rates, we get a patchwork of surcharges, new thresholds, special charges for particular vehicle types and incremental changes to existing reliefs. Every one of these moves can be justified individually, but the cumulative effect is more opacity and more complexity. Over time, that corrodes trust and increases administrative and compliance costs. It also entrenches advantages for those who can afford professional advice, since navigating the maze becomes ever more difficult for ordinary taxpayers.
“The Budget may balance the books on paper, but it has not yet convinced that it will rebalance the country.”
Yet it would be simplistic to dismiss the entire exercise as a crude tax raid. The Budget does face up to several uncomfortable truths that earlier governments either ducked or actively exploited. A welfare system that deliberately pushed children into poverty in order to cut costs was neither morally acceptable nor fiscally sustainable. A world of electric cars makes a tax system built around petrol and diesel untenable. A housing market that has exploded in value at the top end while being taxed on the basis of early 1990s valuations was a recipe for inequality and resentment. On these fronts Reeves has at least started to move, even if some of the steps are hesitant and incomplete.
In the end this is a serious Budget in fiscal terms and a bold one in distributional terms, but it is not a transformative Budget for growth or for the structure of the British state. It makes the state larger and somewhat more generous at the bottom, while expecting almost everyone else to pay more, especially those with capital income and higher property wealth. It is designed to reassure markets and rating agencies, and in that respect it appears to have succeeded. Whether it reassures the public is another question. If over the next few years NHS waiting lists fall, trains become more reliable, schools and councils feel less desperate and energy bills stop lurching from crisis to crisis, voters might accept the quiet squeeze. If instead services continue to feel threadbare and the promised efficiencies never materialise, the perception will harden that Britain is paying near Scandinavian levels of tax for something closer to southern European levels of service. The Budget balances the books on paper. Whether it persuades the country that the trade offs are worth it is a much tougher test that lies ahead.
