London
CNN
—
The United Kingdom is raising taxes by an eye-watering £40 billion ($52 billion), as the government seeks to plug a hole in its finances by targeting higher earners, wealthy foreigners and businesses.
UK finance minister Rachel Reeves, the first woman to ever hold the position, unveiled the tax hikes Wednesday in the ruling Labour Party’s first budget since it won a landslide victory in a general election in July.
The measures — which will increase annual government revenue by £41.5 billion ($54 billion) by the end of the decade — push the tax take to a record 38% of gross domestic product, according to the Office for Budget Responsibility, the UK government’s fiscal watchdog.
“Today, I am restoring stability to our public finances and rebuilding our public services,” Reeves said, arguing that the now-opposition Conservative Party had “failed” Britain, including by inadequately budgeting for required government spending.
“The British people have inherited their failure. A black hole in the public finances. Public services on their knees. A decade of low (economic) growth. And the worst parliament for living standards in modern history,” she added.
Reeves described her budget as charting a “responsible” course while making tough but necessary trade-offs.
“I have had to take some very difficult decisions on tax,” she said.
Reeves had few easy options. Britain has suffered years of lackluster economic growth, low levels of business investment and only tepid improvements in living standards.
A mounting public debt burden — virtually the same size as the economy — means that ever more of the government’s budget is hoovered up by borrowing costs, leaving less for crumbling public services, including the stricken National Health Service.
Before its election victory, Reeves’ Labour Party had pledged to keep taxes on working people “as low as possible,” promising to not raise income tax, sales taxes or payroll taxes.
On Wednesday, the government targeted higher earners instead, announcing plans to tax inherited pensions and unveiling increases to capital gains tax, which is paid on the profits made when selling investment properties and financial assets such as shares.
“The change is a blow for investors… it also makes investment less attractive for newcomers,” said Sarah Coles, head of personal finance at UK financial services firm Hargreaves Lansdown. “Already, far fewer people in the UK invest than elsewhere in the world, and this could compound the problem.”
Reeves also said the government would move ahead with plans, first announced by her predecessor, to abolish the non-domiciled tax regime that applies to people who live in the UK without paying tax in the country because they claim to have permanent residence abroad. The government will instead introduce a new tax system for such individuals, raising £12.7 billion ($16.5 billion) over the next five years.
In another salvo targeting the jet-setting super-rich, Reeves increased duties on private jet travel by 50%, which she said amounted to an additional £450 ($585) per passenger for a flight to California.
She also confirmed plans to scrap a 20% tax break on private school fees and remove the relief that private schools currently enjoy on taxes on commercial properties known as business rates.
About 620,000 children are currently enrolled in private schools in Britain, equivalent to almost 6% of all schoolchildren, according to the Independent Schools Council.
The biggest revenue-raiser will be an increase to employers’ National Insurance contributions, a type of tax on the income of salaried workers. The tax hike will eventually raise £25 billion ($33 billion) per year. The government has also reduced the threshold at which that levy is paid, although small businesses will be exempt from the changes.
Roger Barker, director of policy at the Institute of Directors, warned that the changes to employers’ National Insurance contributions could hurt business confidence and economic growth, while also diminishing opportunities for workers.
In better news for Britain’s economy, the government’s plans for higher investment, including on infrastructure, and research and development, could lift long-term economic growth prospects, according to Barker.
Reeves announced plans to boost public investment by more than £100 billion ($130 billion) over the next five years, including via a £70 billion ($91 billion) National Wealth Fund to invest in “industries of the future,” including battery factories and green hydrogen.
The OBR estimates that the newly unveiled budget will boost Britain’s output next year and in 2026 but leave the size of the economy “largely unchanged” in five years’ time.
The UK economy has grown faster than expected this year, following a shallow recession at the end of 2023. Last week, the International Monetary Fund upgraded its forecast for Britain’s GDP growth to 1.1% this year, 0.4 percentage points higher than it predicted in July.