By Kate Holton

LONDON (Reuters) – British finance minister Rachel Reeves' first budget represents a significant risk as she aims to quickly rebuild the country using the tens of billions of pounds raised in taxes, even as businesses express frustration over the changes.

Reeves and Prime Minister Keir Starmer have faced numerous challenges since their election in July, with Reeves under pressure to justify her tax increases intended for enhancing public services without hindering economic growth.

Ultimately, she announced £40 billion ($52 billion) in tax increases—the largest in three decades—and relaxed debt constraints to enable more borrowing for investment. Emphasizing a commitment to avoid burdening "working people," she targeted taxes mainly at businesses and the wealthy, increasing rates on inheritance, capital gains, second homes, private jets, and private schools.

After courting major corporations and promising political stability, Reeves faced backlash from businesses that claimed increased taxes would limit their ability to invest, impacting productivity.

In Parliament, she argued that businesses need to contribute more, stating, "Successful businesses depend on successful schools. Healthy businesses depend on a healthy NHS. And a strong economy depends on strong public finances."

A senior Labour lawmaker expressed hope that bundling the unfavorable news in this first budget could eventually lead to stronger economic growth, improving public services and allowing tax reductions in future fiscal statements. However, if economic growth does not materialize, the Labour government could face serious challenges.

According to a budget watchdog, the economy is predicted to grow less than previous estimates from 2026 to 2028, with only slight improvements expected in 2024 and 2025.

Labour's election in July wrapped up 14 years of Conservative rule and charged the government with modernizing British infrastructure and public services amidst high debt and sluggish growth.

Reeves successfully raised borrowing without triggering bond market chaos, a problem that previously led to the downfall of ex-Prime Minister Liz Truss in 2022, largely due to investor acceptance of her infrastructure spending plan.

Yet, the reaction from businesses has been challenging. The Institute of Directors noted that many companies would find it hard to move past the tax increases.

"Business leaders can only hope that this is a big bang now, to wipe the slate clean, and that there will be no further shocks of this magnitude in the lifetime of this parliament, enabling business to plan with more confidence," said policy director Roger Barker.

Critics warn that increases in capital gains, inheritance, and taxes on wealthy foreign individuals threaten to diminish Britain’s entrepreneurial spirit. Andrew Noble from Par Equity cautioned that the capital gains tax hike could hinder the country’s ability to attract and retain talent necessary for a prosperous future.

SPENDING SURGE

The budget allows for a near £70 billion annual spending increase over the next five years—2% of economic output—as Reeves and Starmer aim to rebuild the UK's foundations while avoiding a return to austerity from the Conservatives after the 2008 financial crisis.

Many public services have faced significant funding cuts, contributing to widespread discontent amidst stagnant wages and tumultuous politics. Reeves and Starmer hope their budget plan will start improving hospitals, schools, roads, and trains, rewarding voters who elected them.

To maintain voter support, they also proposed modest measures, including a reduction in the price of draught ale, a freeze on fuel duty, and avoiding expanding the taxpayer base.

Jonathan Portes, a King's College London professor and former Treasury employee, suggested that larger companies might handle increased social security contributions if the government provides a long-term vision that fosters investment.

He emphasized that the government must effectively allocate funds to enhance public services and invest in infrastructure for sustained growth. "She has to do both to make this government a success," he stated.

($1 = 0.7688 pounds)