Chancellor Reeves set to raise taxes, spending, and borrowing next week
Chancellor Rachel Reeves MP will hold her first Budget next week on Wednesday 30 October. The Budget will be the Labour Party’s first fiscal statement whilst in power in nearly fifteen years. The Chancellor has heavily alluded to higher taxes, spending, and borrowing, with an eye towards rewriting the UK’s fiscal rules to allow herself more freedom to do so. With a 166-seat working majority, the Budget’s policy actions will likely pass.
Our view:
Labour is still finding its feet. Most of the party’s political operatives have never been in power before. That relative inexperience has allowed for drift to set in, and hurt Labour’s ability to control the media narrative ahead of the Budget
Tax rises and tightening of business incentives have been baked into expectations, hurting business sentiment and confidence, but bolstering trade union support
Labour’s core voting blocs i.e. centre-left voters and trade unions, are likely to support the Budget’s aims, even as the media continues to focus on voting blocs that traditionally back the Conservatives i.e., pensioners and businesses
Our wider view:
Labour has spent months foreshadowing tax rises that will likely hurt growth and employment. Chancellor Reeves and PM Starmer have both said next week’s Budget will be “painful” with taxes on businesses, entrepreneurs, and asset holders likely to rise. The continuously downbeat signals coming out of No 10 and HM Treasury have negatively affected business and consumer sentiment, with an above average number of business owners even selling their businesses pre-emptively to avoid a rise in capital gains tax. Falling sentiment amongst businesses and consumers will likely have already led to lower growth and investment, the opposite of Labour’s stated political and economic aims.
Labour’s tax rises are likely to hurt Conservative voters. Most of the taxes trailed as likely to rise tend to be either paid by Conservative voters, popular with Labour voters, or both. Some of the taxes more likely to rise include employers’ national insurance (a type of payroll tax), capital gains tax, VAT on private schools, dividend tax, and business rates for online retailers. Raising these taxes, while also increasing public spending and borrowing, is likely to negatively affect Labour’s standing with the business community, rather than its core voters, who broadly support both higher taxes on business and higher public spending.
Labour will try to get as many politically unpopular decisions out of the way as early as possible. Chancellor Reeves and PM Starmer have spent months blaming the previous Conservative government for their poor fiscal inheritance. After Labour’s first Budget, they will be less able to employ this tactic. However, with the Conservatives still battling Reform on their right flank and undertaking their own leadership contest (set to end November 2nd), Chancellor Reeves and PM Starmer have likely calculated that that they will have at least four years after this Budget to regain public support ahead of the next election, and so will likely argue that the UK “needs to take its medicine.”
The Budget will pass. With a 166-seat working majority, it is likely that most if not all of the Budget’s policies and legislation will pass. Following the Chancellor’s speech, some tax changes will be brought in either immediately afterwards or within ten sitting days. The much larger remainder will pass through Parliament via a Finance Bill, which must be approved within seven months.