Written by: David Milliken and Sachin Ravikumar

LONDON (Reuters) – Britain’s new finance minister, Rachel Reeves, announced the biggest tax increases in three decades in her first budget on Wednesday, accusing the former Conservative government of breaching the country’s public services.

Businesses and the wealthy would bear the brunt of the tax increases, and Reeves also paved the way for higher borrowing for investment to boost the British economy, which has been slowing due to the 2007-09 global financial crisis, Brexit, Covid-19 and rising energy. prices.

The former Bank of England economist, who said she was proud to be the first female Chancellor of the Exchequer, emphasized that there would be no repeat of what former Conservative Prime Minister Liz Truss dragged the bond market into a deadlock in 2022 with her unfunded tax cut. plans.

The initial reaction to his speech was that investors were unimpressed with Labour’s first economic programme.

But government prices later fell as the scale of planned spending was revealed and investors reduced bets on the Bank of England cutting interest rates next year.

Reeves accused the Conservatives of leaving Labor with a “black hole” in the budget, saying he would raise taxes by 40 billion pounds ($52 billion) a year.

“Any responsible Chancellor will take action,” he said. “That’s why today I’m restoring stability to our public finances and rebuilding our public services.”

It painted a bleak picture of Britain, with record waiting times for healthcare, children attending dilapidated schools and dysfunctional transport and justice systems.

But in a setback for the new government, the economy is expected to grow less than previously forecast between 2026 and 2028, after performing only slightly better in 2024 and 2025, the budget watchdog said.

Citing the scale of the new tax increases on top of those from the previous government, the watchdog also said Reeves’ plans would boost the government’s tax revenues to a historic high of 38.2% of economic output by the end of the decade. This rate is still lower than in many other European economies, but higher than the current 36.4% and more than 5 percentage points higher than before the pandemic.

Tax increases of £40 billion would be equivalent to 1.25% of economic output, according to the Institute for Fiscal Studies think tank, which a recent Conservative-run budget plan only surpassed in 1993.

Prime Minister Keir Starmer has warned that “those with the broadest shoulders” will have to pay more to save “working people”.

The yield on 10-year British government bonds, which moves inversely to prices, was up nearly four basis points on the day at 16:00 BST, after falling sharply during Reeves’ earlier speech.

Given the size of government spending, investors were pricing in fewer rate cuts from the BoE; In 2025, a reduction of four quarter points was expected, compared to about five points at the beginning of the day.

TAXES INCREASED FOR BUSINESSES AND THE RICH

Reeves announced a series of tax increases, saying “difficult decisions cannot be continually postponed or postponed” as he sought to maintain his new rule to bring daily spending back into balance by the end of the decade.

The rate of social security contributions paid by employers will rise by 1.2 percentage points to 15% from April, and the threshold at which firms will start paying will also fall, raising an extra £25bn a year over five years.

Company bosses have warned that higher taxes, along with new protections planned for workers and a rising minimum wage, could undermine Labour’s growth ambitions.

“This is a challenging budget for business,” CBI CEO Rain Newton-Smith said.

Newton-Smith said a cap on a tax on business profits was welcome, but the overall increase in employer costs would “impact on the ability to invest and ultimately make it more expensive to hire people or give them pay rises”.

Other revenue-raising moves included changes to capital gains and inheritance taxes, as well as taxes paid by private equity managers, non-resident residents, and users of private jets and private schools.

But Reeves ruled out unexpectedly more people paying basic and higher income tax rates after the payment threshold freeze ends in the 2028/29 tax year.

It also extended the freeze on fuel duty and reduced the duty on draft beer in pubs; These were measures that could help reverse the decline in support for Starmer’s fledgling government in opinion polls.

In another major move, Reeves said he would change a second round of fiscal rules to allow more borrowing, paving the way for £100bn of investment over the next five years.

Reeves said the government would now target a reduction in public sector net financial liabilities as a share of the economy, rather than public sector net debt excluding the BoE.

Latest forecasts showed the government is on track to borrow almost £142bn more over the next five years than previous forecasts.

Premier Miton Investors Investment Director Neil Birrell said that the situation for investors continues to be difficult with high taxes.

“It’s possible that investment and equity markets will not see the package as bad as it could be. But since the investment plans are long-term in nature, it doesn’t feel like a budget for growth,” he said.

(Additional reporting: Andy Bruce, Suban Abdulla, Muvija M, Sachin Ravikumar, Andrew MacAskill, Alistair Smout, Elizabeth Piper, Catarina Demony, Michael Holden; Graphics by Sumanta Sen; Writing by William Schomberg; Editing by Hugh Lawson)