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Rachel Reeves announces £40bn tax rise in UK budget
British Prime Minister Rachel Reeves announced $40 billion in tax hikes, the biggest in a generation, leaving businesses to bear the brunt of a budget she said would fix Britain's broken public finances and public services.
Wednesday's additional borrowing of $28 billion per year on average for Congress unnerved investors and pushed government borrowing costs, already sharply higher than budgeted, to their highest level in five months.
The decision to increase taxes, spending and borrowing is a big gamble for Reeves, the first woman to serve as prime minister in the country's 800-year history.
Massive tax rises, accompanied by significant increases in spending on the NHS and schools, will push Britain's tax burden to its highest ever level. This was accompanied by a planned 100 billion increase in capital spending, funded through additional borrowing from Congress.
Reeves told the House that these choices were not easy but responsible, and Labor MPs cheered ecstatically. Conservative leader Rishi Sunak said he had repeatedly broken his promises.
The majority of the tax increase will come from a $25 billion increase in employer-paid national insurance, which will rise by 1.2 percentage points to 15% from April. The level at which employers start paying NI to workers will be lowered from 9,100 to 5,000.
Business groups have warned that raising NI for employers could force some companies to lay off staff or close at a time when wages and other labor costs are also rising.
About $9 billion a year would be raised through increased taxes on people who benefit from the non-dom scheme for wealthy foreigners' overseas income, as well as on groups including private schools, energy companies and private equity bosses.
As part of moves to abolish the non-dom regime, the government said it would end the use of offshore trusts to shield assets from UK inheritance tax, ignoring warnings that such a move could trigger an exodus of wealthy people from the UK.
The Prime Minister added that instead of this plan, the UK would introduce a new, internationally competitive residency program.
Reeves announced an immediate increase in the lower tax rate from 10% to 18% and the higher tax rate from 20% to 24%. She also said an estate tax increase, particularly on pensions, would raise $2 billion a year in revenue.
In a move closely watched by private equity executives, she said Labor would increase the capital gains rate on held interest from 28% to 32% from April.
The change stopped short of taxing interest at the top income tax rate of 45%, but advisers warned that by suggesting there was a compelling case for further reform of held interest, Reeves was leaving the door open for further tax increases. .
The Prime Minister confirmed that England's National Living Wage will rise by 6.7% to 12.21 from April next year in a bid to empower those at the other end of the income spectrum, with a bigger rise for the youngest workers.
British government bonds initially welcomed Reeves' comments but began selling after the Treasury released figures showing debt sales would rise to 300 billion this financial year, up from previous estimates of 278 billion and higher than investor expectations.
The yield on 10-year gold bonds rose from 4.21%, the lowest during Reeves' speech, to 4.37%.
The benchmark FTSE 100 fell 0.6%, while the domestically focused mid-cap FTSE 250 rose 0.3%, helped by gains in energy company shares.
Citing the disastrous impact Liz Truss' 2022 mini-budget had on bond markets, Vivek Paul, BlackRock's chief UK investment strategist, said the pre-budget briefing had had the desired effect broadly on the current markets. It's a far cry from the 2022 episode.
The Prime Minister said the budget would stabilize public finances, shore up crumbling public services such as the NHS and pave the way for higher growth.
In total, she has raised taxes by $41.1 billion a year by the end of the 2029/30 forecast period, while spending, including capital investment, has increased by $74.1 billion in the same year, leaving Reeves' funding gap at $32.9 billion.
The independent Office for Budget Responsibility said the overall effect of Reeves' budget decisions would be to raise CPI inflation by about half a percentage point from its peak.
It added that real disposable income per capita, a measure of living standards, will be 1.25% lower than the March forecast by early 2029.
Reeves' tax rise, one of the largest in the budget relative to national income, surpassed those of his predecessors Rishi Sunak (2022), George Osborne (2010) and Gordon Brown (2002).
The OBR forecasts that taxes as a share of GDP will rise to a record high of 38.2% in 2029/30 from 36.4% this year.
Reeves announced a $6.7 billion increase in capital investment in education, a 19% increase in real terms this year.
She also pledged to increase the daily health budget by 22.6 billion over two years and increase the NHS capital budget by 3.1 billion, which she described as the biggest real increases since 2010 outside of the Covid-19 pandemic. .
But she said the freeze on personal income tax and national insurance thresholds would not be extended beyond 2028 as planned by the last government.
The Prime Minister maintained Britain's long-standing fuel tax freeze but increased taxes on corporate jet use.
She said departmental daily spending would rise by 1.5% in real terms from next year, pledging that the UK would not return to austerity. This remains a tight spending agreement compared to the previously planned 1%.
Capital expenditure spending will increase by 1.7% in real terms.
In a combative budget speech, Reeves said the previous Conservative government hid the reality of its public spending plans from voters and the independent forecaster, the OBR.
She told parliament she would never again allow the government to spend public finances hastily and loosely. But Sunak said the OBR had made no mention of the 22 billion black holes Reeves claims to have discovered.
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Reeves confirmed the government's new investment rules would expand the scope for borrowing by defining debt as public sector net financial liabilities. She added that under the government's new rules, net financial debt would fall in the third year of all projections.
The OBR predicted the Chancellor's budget would allow her to meet revised debt rules two years ahead of schedule, leaving her with $15.7 billion of wiggle room.
Debt, as measured under the previous benchmark underlying public sector net debt, is set to continue to increase across councils until the end of the decade.
In its budget forecast, the OBR said UK real GDP growth would be 1.1% this year, 2% in 2025, 1.8% in 2026 and 1.5-1.6% for the rest of the decade.
Additional reporting by Ian Smith and Harriet Agnew
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