UK’s Labour to unveil hotly-awaited budget with billions in tax rises expected

After months of commentary from Labour officials, economists are eyeing billions of new public spending and tax rises ahead.

The party has already announced some of the areas it will gain extra tax revenue from, including changes to the rules on so-called “non-doms” whose permanent residence is outside of the U.K. for tax purposes; a higher energy profit levy; an increase in duties paid by overseas nationals buying U.K. residential property; and the introduction of value added tax (VAT) on private school fees.

Researchers at bank Barclays said in a note last week they expect between £20 billion ($26 billion) and £36 billion in additional spending for 2025 to 2026, offset by around £23 billion in extra revenue from tax increases — with higher employer contributions to National Insurance, a general taxation, playing a key role.

Citing government sources, the BBC has reported that the budget will both raise the percentage that employers pay in NI per worker, and also lower the rate at which they begin to pay it. This could raise a total £20 billion, according to economists.

Consultancy Deloitte highlights several unknowns to look out for in the budget, including on business rates, capital gains tax, inheritance tax and changes to taxes on the performance of carried interest payments in private equity.

Economists at Investec said in a note Monday that budget measures could include higher capital gains taxes on the sale of shares; closing or reducing the benefit from the “carried interest loophole;” potential changes to the pension system, such as a reduction in the lump sum amount that can be drawn down tax free; and the closure of some inheritance tax loopholes. Hikes to air passenger duties and bank corporation tax surcharges could also be raised, the said.

Analysts also say so-called “sin taxes” could be a Labour target, on areas such as gambling, vaping products and tobacco.

— Jenni Reid

Finance Minister Rachel Reeves last week confirmed she intends to change U.K. fiscal rules as part of the budget, enabling her to free up billions of pounds for investment.

Writing in The Financial Times, Reeves said the change “will make space for increased investment in the fabric of our economy, and ensure we don’t see the falls in public sector investment that were planned under the last government.”

Reeves did not specify exactly what the investment rule would change, but it has been reported the Treasury could target public sector net financial liabilities (PSNFL) in the U.K.’s measure of debt, rather than public sector net debt.

The PSNFL measure takes in a wider account of the government’s balance sheet, including financial assets and liabilities, compared to public sector net debt.

The Institute for Fiscal Studies, an influential think tank, said on Sept. 30 that a change in the fiscal rules to target PSNFL would offer as much as £50 billion ($64.8 billion) of additional headroom for the government.

— Sam Meredith

U.K. Prime Minister Keir Starmer and Finance Minister Rachel Reeves have delivered one message clearly in the run-up to the budget: pain now, for gain — in the form of economic growth — later.

Starmer has said his government will take “painful” decisions in order to close a hefty budgeting shortfall left by the previous administration, adding that those with the “broadest shoulders should bear the heavier burden.”

An early controversial decision has been to introduce means testing on winter fuel support payouts for pensioners.

His pledge not to raise taxes on “working people” has sparked debate over what defines that group. Subsequent comments by Labour figures have suggested this is a commitment not to raise income tax or national insurance contributions; but higher taxes for business owners or those who make income through shares or assets such as property have not been ruled out.

Reeves has vowed that there will be “no return to austerity,” referencing the economic program introduced by the Conservative Party in 2010 in the wake of the global financial crisis which involved deep cuts to public spending.

She has said this is because she will increase investment in areas including infrastructure and the energy transition.

All eyes are now on how Starmer and Reeves attempt to balance promises to boost public investment and increase funding to struggling areas such as the National Health Service, while also meeting their self-proclaimed “fiscal rules” to move the budget into balance and see debt fall as a share of GDP within five years.

— Jenni Reid

Close attention will be paid to the response of the U.K. bond market to Wednesday’s budget, which comes two years after a huge package of unfunded tax cuts announced by former Prime Minister Liz Truss caused yields to spike.

“If there’s one thing bond vigilantes hate more than an expansive budget it is a surprisingly expansive budget,” George Lagarias, chief economist at Forvis Mazars, said Tuesday — noting this explains why some upcoming changes have been leaked to the press in recent days.

“It is a challenge when a new Chancellor is presenting a budget. An even bigger one when it is on behalf of a completely new government, especially from a party known for fiscal expansion. The level of difficulty is further raised by the fact that bond markets have been especially jittery in the past few weeks, as traders find themselves in need to readjust their rate expectations for the U.S., in light of stronger growth data,” Lagarias said.

“Shifting the accounting rules is a very old practice and might be less effective at a time when bond markets are looking carefully [at the Budget] … Ultimately, however, governments will need to figure out ways to significantly improve productivity if they are to maintain their citizens’ way of life,” Lagarias added.

Joe Maher, assistant economist at Capital Economics, said in a note Monday that the current macroeconomic backdrop was “much less conducive to a bond market panic than [under Truss] in September 2022,” when it was feared fiscal expansion would push inflation and interest rates higher.

“By contrast, we suspect that investors are now likely to be more tolerant of looser fiscal policy given inflation has fallen back to the Bank of England’s 2% inflation target and interest rates are likely to trend downwards,” Maher said.

Maher added that bond market nerves should also be eased by Labour’s repeated assurances on its fiscal prudence, the likely need for less of an increase in government borrowing than Truss’s plan would have required, and the fact that increased borrowing would be for public investment.

— Jenni Reid