UK Raises Taxes By £26 Billion In Day Of Budget Chaos

Chancellor of the Exchequer Rachel Reeves announced £26 billion ($34 billion) of tax increases in a budget that was meant to convey stability but left investors reeling when most of the key measures were accidentally released early. 

The policies in the budget, in which Reeves more than doubled her key fiscal buffer to £22 billion, were posted online by the Office for Budget Responsibility about an hour before she rose to speak in the House of Commons. The OBR apologized and launched an investigation into the error, which Reeves described as “deeply disappointing.”

Still, the budget provided little relief for those expecting Prime Minister Keir Starmer’s Labour government to make the hard choices to control costs and break the UK out of its cycle of stagnation. In a disappointment for investors, tax increases were largely backloaded with a freeze on income-tax thresholds for three more years, dragging an estimated 1.7 million more people into higher rates. 

UK markets fluctuated after the early release of the OBR report, with gilts swinging between gains and losses. The 10-year yield was one basis point lower at 4.47% in London. The pound was trading higher. 

“The budget does little to seriously tackle sluggish growth, low confidence or a bloated public sector financed by a distortive tax system,” said Kallum Pickering, chief economist for Peel Hunt.

One of the most significant metrics revealed in the OBR analysis, which was then confirmed by Reeves in Parliament, was the figure for the headroom she has secured against the fiscal rules, the most achieved in a British spending plan since March 2022 and well in excess of the median estimate of £15 billion from the banks surveyed by Bloomberg.

Taken as a whole, the major tax-and-spend policies announced in the budget were judged by the OBR not to move the needle on UK growth, having “no significant impact on output by 2030,” which will come as a relief to the chancellor, given tax raises had been expected to constrain economic activity. Still, it does little to further what the governmnet has said to be its no. 1 ambition of growth.

While the chancellor began the unusually long budget run-up by signaling that she would prioritize the markets, she tacked left toward the demands of Labour Members of Parliament as the weeks wore on. The flurry of reports about what the Treasury was considering — and suddenly abandoning — was intense even by Britain’s traditional standard of pre-budget speculation.

Among other things, she shelved plans to increase the basic rate of income tax, a move that would’ve raised much more money, but breached Starmer’s campaign promises not to raise broad-based taxes. The prime minister was forced to brush back reports of plots against his leadership as opposition to tax increase circulates. 

The expanded fiscal buffer was achieved by raising taxes by £26.1 billion, A large chunk of that came from a three-year freeze on income-tax thresholds. At last year’s budget Reeves had decided against that course of action, saying that extending the threshold freeze would “hurt working people.”

“Rachel Reeves has swerved away from breaking Labour’s manifesto promise and hiking the basic rate of the big three taxes in her budget,” said James Crouch, head of policy and public affairs at Opinium. “But the chancellor’s workaround to raise revenue by freezing income tax thresholds will nevertheless result in millions more paying higher taxes over the next few years.”

Budget measures revealed in the OBR report include:

• Freezing personal tax and employer National Insurance contributions (NICs) thresholds for three years from 2028-29, raising £8 billion

• Charging national insurance on salary-sacrificed pensions contributions, raising £4.7 billion

• Increasing the tax rates on dividends, property and savings income by 2 percentage points, raising £2.1 billion

• A reduction to the writing down allowance main rate in corporation tax, raising £1.5 billion

• A new mileage-based charge on battery electric and plug-in hybrid cars from April 2028, raising £1.4 billion

• Reforming gambling taxes, raising £1.1 billion

The OBR documents show that today’s budget means the UK tax burden will hit 38% of GDP, rising sharply in the coming years and reaching the highest since records began just after the second world war. That is up from 35% of GDP in 2024-25 and brings the UK closer to many of the higher-spending governments across Europe. 

Reeves said the long-expected productivity downgrade that required an increase in taxes constituted a judgment on 14 years of Conservative government that ended when Labour won last year’s general election. She blamed Brexit, the Covid pandemic and years of under-investment under the Tories. 

The OBR estimates inflation over the next two years to be about 0.5 percentage point higher than in March. Meanwhile, growth was downgraded across the forecast to reflect lower productivity. 

An early release has never happened in the 15 years since the OBR was established in 2010. It will raise serious questions about the budget watchdog processes and is likely to put the chair, Richard Hughes, under pressure. It caps a torrid period of pre-budget speculation when, according to a rebuke made by the deputy speaker of the house, leaks to the media appeared to have reached an “unprecedented high.”

Mel Stride, the opposition Conservative Party’s shadow chancellor, said the leak was “utterly outrageous” and “may constitute a criminal act.”