Reeves to face scrutiny over Budget that raises taxes, borrowing and spending

The overall tax burden will reach a record 38.3% of gross domestic product (GDP) in 2027-28.

Chancellor of the Exchequer Rachel Reeves poses outside 11 Downing Street, London, with her ministerial red box, before delivering her Budget (Lucy North/PA) (PA Wire)

Rachel Reeves will face further questions about her Budget after announcing £40 billion a year in extra taxes to pour money into schools, hospitals, transport and housing.

The Chancellor is expected to make a visit related to the Budget on Thursday with Sir Keir Starmer as MPs debate the measures in the Commons and think tanks present further analysis.

Ms Reeves said Labour’s first Budget since 2010 would be a one-off to “wipe the slate clean”, but the head of the influential economics think tank the Institute for Fiscal Studies warned that more tax rises could come if Labour’s planned growth does not materialise.

Despite Labour’s promises to protect “working people”, a £25.7 billion increase in national insurance contributions paid by employers is likely to reduce wages and lead to job losses.

The overall tax burden will reach a record 38.3% of gross domestic product (GDP) in 2027-28, the highest since 1948 as the UK recovered from the impact of the Second World War.

And changing the way government debt is measured allows the Chancellor greater flexibility to borrow, resulting in what the Office for Budget Responsibility (OBR) called “one of the largest fiscal loosenings” in recent decades.

The tax hikes and increased borrowing allow Ms Reeves to provide a £22.6 billion increase in the day-to-day health budget as well as a £3.1 billion increase in the capital budget, which she called the “largest real-terms growth in day-to-day NHS spending outside of Covid since 2010”.

The Budget measures include:

– Capital gains tax to go up by £2.5 billion, with the lower rate to rise from 10% to 18% and the higher rate from 20% to 24%.

– Changes to inheritance tax, including bringing pension pots within the tax from April 2027, and reducing reliefs for agricultural and business property, raising a total of £2 billion a year.

– Income tax thresholds will rise in line with inflation from 2028-29, reducing the impact of “fiscal drag” where rising wages see people pulled into higher tax bands.

– The freeze on fuel duty will continue, including maintaining the existing 5p cut.

– Draught duty will be cut by 1.7%, knocking a penny off a pint in the pub, but other alcohol rates will increase.

– Imposing VAT on private schools will raise £1.7 billion by 2029-30Changes to the energy profits levy and air passenger duty rates will rake in £3.6 billion.

– The stamp duty land tax surcharge for second homes will increase by two percentage points to 5% from Thursday.

The OBR’s forecast suggested the increase in spending would provide a temporary boost to GDP, but predicted downgrades in subsequent years, and said that the Budget measures will add to pressure on inflation and interest rates.

The latest OBR forecasts indicate that inflation will rise to 2.6% in 2025 – significantly above the 1.5% rate previously predicted – “partly due to the direct and indirect impact of the Budget”.

“This is not the sort of Budget we would want to repeat,” the Chancellor told the BBC.

“But this is the Budget that is needed to wipe the slate clean and to put our public finances on a firm trajectory.”

But Paul Johnson, director of the IFS, said she may need to raise taxes again in a few years if extra borrowing in the Budget does not lead to increased growth.

He added: “The first gamble is that a big cash injection for public services over the next two years will be enough to turn performance around, and that many of the temporary spending pressures won’t persist.

“If she’s wrong about that, and spending pressures don’t dissipate after two years, then to avoid cutting unprotected areas she may well need to come back with another round of tax rises in a couple of years’ time – unless she gets lucky on growth.”

Higher rates on employers’ national insurance contributions (NICs) and a lower starting threshold will raise £25.7 billion by 2029-30.

The rate will increase by 1.2 percentage points to 15% from April 2025, with payments starting when an employee earns £5,000, down from the current £9,100.

The OBR forecasts that by 2026-27 some 76% of the total cost is passed on through lower real wages – a combination of pay cuts and increased prices.

The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the watchdog said.

Ms Reeves accepted that employees will bear some of the burden of increasing employer’s national insurance rates.

“The way I have structured it is that businesses pay that tax.

“I accept that some of that burden will be felt on employees, but if I had increased employee national insurance, or income tax, all of the burden would have been felt by working people,” Ms Reeves told the News Agents podcast.