UK budget: 5 things you need to know as Labour hikes taxes

LONDON — Rachel Reeves just delivered the first Labour budget since 2010 — and set Britain out on a markedly different course.

With taxes and borrowing hiked, and big cash boosts promised for schools and the health service, the leftward economic shift under Britain’s newly elected Labour government was arguably even more pronounced than many were expecting pre-budget.

Here are five things you need to know.

1) Britain’s tax burden is at record levels

Reeves’ budget hiked taxes by £40 billion a year. The litany of tax rises, mostly targeting businesses and high-wealth Brits, will take the U.K’s tax burden to more than 39 percent of gross domestic product by 2029 — its highest post-war share of the economy.

That’s far above what Prime Minister Keir Starmer promised during the election campaign, after repeatedly saying no tax rises were needed above what was outlined in Labour’s manifesto. The government is arguing that its fiscal inheritance was far worse than it expected and that extra cash is needed to prop up Britain’s struggling public services.

The bulk of the tax hikes come from an increase in national insurance contributions for employers, with an offset for Britain’s smallest businesses providing some relief for small and medium-sized firms. There are also increases to capital gains tax for shareholders, stamp duty on second homes, passenger duty on private jets and the imposition of VAT on private schools.

2) NHS and schools win big

Reeves said the tax hikes were necessary to stop a second round of austerity, with Britain’s creaking health service the biggest winner. The NHS’s day-to-day budget will increase by £22 billion next year, in the biggest real-terms increase for the health service since 2010 (the Covid-19 years not included.)

The health service will also get billions of pounds of extra capital investment, along with a host of promised reforms, in a bid to cut back the NHS waiting list which sits at nearly 8 million.

It shows just how politically important an improvement in the NHS is for this government. Polling consistently showed it was the top issue for voters in the July election. Many in Labour believe that they will only win a second term in 2029 by drastically improving NHS outcomes.

The education department also got a large uptick in spending. It’s bagging a 20 percent increase in capital spending, earmarked for building and improving schools.

3) Growth still anaemic

Despite the tidal wave of fiscal policy changes announced today, the Office for Budget Responsibility (OBR) expects U.K. economic growth to remain anaemic. In fact, the budgetary watchdog reckons economic growth will be slower than previously expected after this budget by the end of the decade.

After a two year uptick, growth is expected to be lower in 2026-2029 than under the previous Tory government. The OBR also reckons today’s increase in taxes, spending and borrowing will also increase inflation and bond yields over the term of this parliament.

In other words — the OBR reckons Reeves’ decisions will mean higher mortgage rates and government borrowing costs.

4) Labour bets big on infrastructure

Reeves is betting big that her budget will sow the seeds for long-term economic growth by clearing up space for tens of billions in extra infrastructure spending. Her decision to change the government’s fiscal rules, by adjusting how debt is measured, will now allow the government to borrow far more to invest in infrastructure over the next five years.

Reeves is hoping this extra investment will help drive up supply and economic growth in the U.K. economy, while also powering the green transition.

The money will be spent on green energy projects, on things like carbon capture and wind energy, and new transport infrastructure. The government is banking on this extra investment spending crowding in even more private industry spending in these areas through what is known as a multiplier effect.

5) This is not Tony Blair’s New Labour

This was a budget that hit high earners and businesses in a way which Labour election-winner Tony Blair would never have dreamed of — especially just after winning office. Reeves created clear winners and losers by hiking taxes on businesses, high-worth individuals and private schools to increase spending on public services.

It is an explicitly worker-oriented economic policy which has seen Labour draw dividing lines in a way the party shied away from under Blair.

Starmer and Reeves will argue this kind of change is necessary to mend Britain’s public services and fundamentally reorient the British state. But they will surely only have the political space to do this type of tax-hiking budget just once during their five-year term in government.