Chancellor Rachel Reeves has announced an avalanche of tax rises on the wealthy and on working people, adding up to £26bn to fund extra spending over the next five years, as she vowed to make the country more “secure”.
Her biggest announcement included freezing income tax and national insurance thresholds until 2031 to raise £11bn by the end of parliament.
It represents another government U-turn after Reeves said last year she would unfreeze tax bands from 2028 in order to keep to “every single promise” she made in the Labour manifesto.
The measure is widely referred to as a “stealth tax” as earnings are taxed more in real terms due to the rise in inflation, with people on the state pension set to be dragged into bands for the first time next year.
The Chancellor also targeted the wealthy by introducing new taxes on pension contributions, dividends and savings incomes. A new pay-per-mile road tax for electric vehicle drivers would also raise £1.4bn.
The brutal fiscal measures came in response to the OBR’s critical view of Labour’s growth mission.
Her previous £9.9bn headroom left at the Spring Statement was wiped out by the OBR’s 0.3 percentage point downgrade to productivity forecasts, leaving growth weaker in every year of the OBR’s forecast period other than 2025.
Abandoned welfare savings due to a backbencher revolt earlier this year also added to the fiscal hole faced by the Chancellor.
Reeves said: “These forecasts are the Tories’ legacy, not Britain’s destiny. We beat the forecasts this year and we will beat them again.”
Reeves boosts headroom to £22bn
Reeves also said the government would scrap the two-child benefit cap in an appeal to her backbenchers, adding some £3bn to welfare spending.
Reeves has now left herself with a fiscal buffer worth £22bn against her “iron-clad” fiscal rules stating day-to-day spending should match tax intake in the last year of the forecast period.
Ahead of her speech, she said she would take action to “help families with the cost of living: and cutting hospital waiting lists.
In response to Reeves’ announcement, shadow business secretary Andrew Griffith said: “This budget process has been a fiasco from start to finish and the unprecedented leak of the OBRs report is just the final embarrassment.”
In other key Budget announcements, the Chancellor announced that £8,000 of the Cash ISA limit of £20,000 would go towards investment, confirming a reduction in government-protected savings.
Frenzied lead-up to the Budget
The Budget speech was undermined by the OBR’s error in publishing the fiscal forecast and all the measures around 30 minutes before Reeves stood up in the House of Commons.
This led to sharp criticism from Shadow Chancellor Mel Stride and the Deputy Speaker of the House of Commons shortly after Prime Minister’s Questions.
The run-up to the Budget featured frenzied briefings on tax hikes and other Budget policies, with Reeves holding a “scene setter” press conference in early November hinting at a rise in income tax rates.
Fresh plans to ditch the tax, which were reported in the Financial Times, led to City traders selling bonds and borrowing costs rising for the government.
Bank of England Governor Andrew Bailey criticised Budget leaks as he said speculation had dampened growth.
Former OBR chiefs also told City AM that the Chancellor could not claim to be surprised by the OBR’s decision to launch a review of its productivity forecasts, leading it to make some costly downgrades.