What Labour’s Budget means for the UK economy

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Opinion

Rachel Reeves recently unveiled her Budget, walking a fine line between protecting public services, boosting investment, and maintaining fiscal credibility. With a pledge not to increase taxes on ‘working people’, Reeves emphasized the need to create “wealth and opportunity for all” through increased investment in the economy.

One of the key announcements in the Budget was a 1.2 percentage point increase in the rate of employer national insurance contributions (NICs), along with other tax changes such as adjustments to inheritance tax and capital gains tax. These measures are expected to generate significant revenue, albeit at the expense of potential wage decreases for workers. Overall, the Budget includes a total tax increase of £40bn by 2029-30.

Reeves also outlined plans to increase day-to-day spending by 1.5 per cent in real terms from 2024-25, with additional funding allocated for defense and public services. The chancellor also highlighted the government’s commitment to higher investment over the next five years, facilitated by changes in fiscal rules.

Speaking of fiscal rules, Reeves has tightened the government’s commitments to ensure that day-to-day costs are covered by revenues and that debt falls as a share of GDP. While these measures are expected to keep the government on track, the fiscal buffers remain relatively modest compared to previous administrations.

In terms of economic impact, the Budget is projected to have a moderate effect on growth, with inflation expected to rise in the short term. The Bank of England’s interest rate decision is not likely to be influenced by the Budget, although inflationary pressures may prompt adjustments in the future.

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From a bond market perspective, investors were largely unfazed by the Budget announcement, with 10-year gilt yields showing a slight decrease post-Budget. Reeves emphasized the importance of responsible investment and value for money, with new bodies established to oversee financial decisions and ensure economic growth.

Looking ahead, Reeves’ fiscal constraints may necessitate further tax increases in the future, despite efforts to build fiscal credibility in the present. The Budget sets the stage for tough decisions and prudent financial management in the coming years.

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budget, economy, Labours, means

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