On Wednesday, UK Chancellor Rachel Reeves announced her first budget since taking office, revealing plans to increase taxes by £40 billion annually, marking the largest rise in thirty years. Reeves accused the former Conservative government of fiscal mismanagement, leading to fragmented public services and an increased fiscal deficit. She plans to rebuild public services, stimulate economic recovery, and ensure fiscal health through higher taxation and issuing bonds.
The budget's proposals for tax increases primarily target high-income individuals and corporations, including raising the employer's national insurance rate to 15% from April next year, modifying capital gains tax and inheritance tax provisions, and increasing the tax rates for private equity, non-domiciled residents, and private school users. Reeves stated that these tax measures would increase the government's revenue share of economic output to 38.2%, five percentage points higher than pre-pandemic levels, and she plans to support long-term investments through bond issuance to accelerate economic growth. This set of measures aims to fulfill the Labour Party's "rebuild" promise, though the short-term impact on growth is expected to be limited.
Reeves emphasized that she would not let public debt spiral out of control and mentioned that former Prime Minister Truss's tax-cutting plans had previously caused market turmoil, highlighting the importance of fiscal stability. However, the market reacted cautiously to the tax plans, with the pound's exchange rate against the dollar slipping slightly below $1.30, indicating a wait-and-see attitude from investors regarding the budget. Analysts noted that while Reeves's tax increases and bond issuance policies could help rebuild public finances, their effect on growth would depend on the strength of policy implementation and changes in the economic environment.
Since winning the elections this year, the Labour Party has been actively pursuing fiscal and economic reforms, planning to gradually increase government revenue over the next five years to close the fiscal deficit. However, the UK economy has remained weak since the 2007-09 financial crisis, compounded by multiple shocks from Brexit, the COVID-19 pandemic, and surging energy prices, continuing to pose challenges to the path of economic recovery. Market observers suggest that if global economic conditions remain volatile, the UK's economic stimulus policies may face additional testing.
