Rachel Reeves has announced a £40 billion tax increase as she presented the first Budget by a Labour government in 14 years.
The Office for Budget Responsibility (OBR) has cautioned that Rachel Reeves’ proposed £40 billion tax increases could weaken long-term economic growth in the UK.
The OBR forecasts that the economy will grow by slightly over 1% this year, rising to 2% in 2025 before falling to around 1.5%, which remains “below its estimated potential growth rate” of 1.66% for the rest of the forecast period.
In the first Labour government Budget in 14 years, Reeves announced a 1.2 percentage point increase in employer National Insurance contributions, bringing it to 15% from April, expected to generate £25 billion in revenue. “I know this is a difficult choice. I do not take this decision lightly,” she remarked.
Reeves also raised the lower capital gains tax rate from 10% to 18% and the higher rate from 20% to 24%, while maintaining capital gains tax rates on residential property at 18% and 24%. Additionally, she extended the freeze on inheritance tax thresholds for another two years, until 2030.
The Chancellor criticized previous Conservative administrations for failing to allocate funds for compensation related to the infected blood and Post Office Horizon scandals. “The recurring shortfall in our public finances, the unfunded compensation payments, and their failure to address challenges facing public services mean this budget includes a £40 billion tax increase,” she stated.
She also announced an additional £22.6 billion for the day-to-day health budget and £3.1 billion for capital investment in healthcare.
For motorists, fuel duty will remain frozen for the next two years. Reeves further confirmed a 6.7% increase in the National Living Wage to £12.21 per hour, alongside a move toward a single adult minimum wage rate.
An increase in employer National Insurance contributions will largely impact working people, according to the Institute for Fiscal Studies.
Paul Johnson, director of the influential think tank, explained: “The OBR estimates that employees will bear about three-quarters of the effect of employer NICs, even if these changes don’t directly appear on payslips.
“In fact, these tax increases partly explain why the OBR has reduced its projections for real household income growth in the coming years.
“Ultimately, working people will bear the cost of higher taxes. The rise in employer NICs also heightens the incentive for employers to shift towards contracting with self-employed workers.”
