Reeves plans big increases in public spending and tax

CHANCELLOR Rachel Reeves will seek to shift the world's sixth-biggest economy, and prime minister Keir Starmer's government, onto a new course next week with big increases in public spending and tax.

The Labour party's first budget in 14 years will end months of speculation about how much Reeves and Starmer will borrow for infrastructure investment and how hard they will hit taxpayers.

Reeves, a former Bank of England economist, has said she will not let public debt balloon, mindful of how former Tory prime minister Liz Truss sent the bond market into a tailspin two years ago with unfunded tax cut plans.

Reeves' budget on Wednesday (30) is likely to include an array of revenue-raising changes, a prospect that has worried households and business already on edge about Labour's plan to give workers more protections in their jobs.

"We've never seen this level of interest in a budget," said Amanda Tickel, global leader for tax and legal policy at accountancy firm Deloitte.

"It's a new government which will potentially have to cast its net wide and it's also about the magnitude of the challenges," she said. "We can expect a significant departure from the past."

Voters turned to Labour in July's election largely for its pledge to fix public services from over-crowded prisons and crumbling public housing to the over-stretched health service.

But Labour's support in opinion polls has been hit by the government's warnings of a painful budget while cuts to fuel subsidies to pensioners angered voters at a time when Starmer's acceptance of expensive gifts from donors was in the headlines.

Reeves plans around £40 billion ($52bn) worth of fiscal measures, according to government sources, mostly from tax increases plus cuts to some public services, to meet her pledge to cover day-to-day spending without borrowing.

Starmer has promised to spare 'working people' but Reeves has not ruled out making businesses pay more social security contributions - a change that could hurt pay and hiring - or making more people pay basic and higher income tax rates.

Taxes on capital gains and dividends, inheritances, non-domiciled residents, fuel and possibly private pensions are also on the table, even with Britain's tax burden already the highest since shortly after World War Two.

At the same time as tightening up on tax, Reeves and Starmer are likely to relax the government's self-imposed rules on borrowing in order to increase investment.

They hope that spending more public money on power networks, transport and other infrastructure will attract the private investment needed to meet their pledge to turn Britain's sluggish economy into the fastest growing in the Group of Seven, overtaking even the US.

"We need to invest more to grow our economy and seize the huge opportunities there are in digital, in tech, in life sciences, in clean energy," Reeves said. "But we will only be able to do that if we change the way that we measure debt."

The Guardian on Wednesday (23) reported Reeves planned to target a measure known as public sector net financial liabilities, replacing the current target of public sector net debt.

Had that approach been used in the last budget in March it would have given the then Conservative government an extra £53bn ($69bn) to borrow, according to the Institute for Fiscal Studies, a think tank.

Reeves confirmed the rules would change without providing details. She said she would not use all the extra room but British government bond prices fell on Thursday (24) as investors responded to the prospect of higher borrowing and how it might slow future BoE interest rate cuts.

Former Conservative finance minister Jeremy Hunt said higher rates for longer would punish families with mortgages. "The markets are watching," he said on X.

Ales Koutny, head of international rates at Vanguard, the world's second-largest asset manager, said Reeves appeared aware of her limits, especially after 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," Koutny said.

(Reuters)