British Finance Minister Rachel Reeves Plans Major Budget Shift

By William Schomberg
LONDON (Reuters) – British finance minister Rachel Reeves is set to redirect the country’s economy and Prime Minister Keir Starmer’s government with significant increases in public spending and taxes next week.

The Labour Party’s first budget in 14 years will clarify how much neither Reeves nor Starmer intend to borrow for infrastructure investment, nor their potential impact on taxpayers.

Reeves, a former Bank of England economist, is conscious of not allowing public debt to rise sharply, recalling the chaos caused by former Conservative Prime Minister Liz Truss with unfunded tax cuts two years ago.

The upcoming budget, due on Wednesday, is expected to include various revenue-raising changes, a concerning prospect for households and businesses already apprehensive about Labour’s proposals to enhance worker protections.

Amanda Tickel, global leader for tax and legal policy at Deloitte, remarked, "We’ve never seen this level of interest in a budget. It’s a new government that might have to cast its net wide due to the magnitude of the challenges. We can expect a significant departure from the past.”

Labour attracted voters in July’s election primarily for its commitment to reform public services, addressing issues like overcrowded prisons, deteriorating public housing, and an overstretched health service.

However, Labour's standing in opinion polls has suffered due to government forecasts of a tough budget and cuts to fuel subsidies for pensioners, which upset voters amidst headlines regarding Starmer's acceptance of costly gifts from donors.

According to government sources, Reeves plans fiscal measures worth around £40 billion ($52 billion), primarily from tax hikes along with reductions in some public services, to ensure daily spending is covered without borrowing.

While Starmer has pledged not to burden 'working people,' Reeves has not dismissed the possibility of increasing social security contributions for businesses, a move that could impact wages and hiring. Furthermore, taxes on capital gains, dividends, inheritances, non-domiciled residents, fuel, and possibly private pensions may be considered, even though Britain already faces the highest tax burden since shortly after World War II.

Increased Investment

At the same time taxes are expected to rise, Reeves and Starmer may also ease the government’s self-imposed borrowing restrictions to boost investment, aspiring that extra public spending on power networks, transport, and other infrastructure will attract private investment to fulfill their ambition of making Britain the fastest-growing economy in the G7, surpassing even the United States.

"We need to invest more to grow our economy and seize the immense opportunities in digital, tech, life sciences, and clean energy," Reeves stated on Thursday. "However, we will only achieve this by altering the way we measure debt."

Reports suggest that Reeves will target a measure known as public sector net financial liabilities to replace the current public sector net debt target. If this approach had been utilized in the previous budget, the Conservative government would have been allowed an extra £53 billion ($69 billion) to borrow, according to the Institute for Fiscal Studies.

Reeves confirmed that the rules would change, although she did not disclose specifics. However, British government bond prices fell on Thursday due to investor concerns regarding the potential increase in borrowing and its implications on future Bank of England interest rate reductions.

Former Conservative finance minister Jeremy Hunt warned that prolonged higher rates would affect families with mortgages, emphasizing, "The markets are watching."

Ales Koutny, head of international rates at Vanguard, highlighted that Reeves seems aware of her limitations, especially following the Truss “mini-budget” crisis of 2022. "This time around, it feels like the rhetoric is much more market aware, which means that we're not so nervous about it," he said.