Reeves launches £26 billion tax raid as welfare spending rises

Rachel Reeves hiked taxes by £26 billion as she faced forecasts of weaker economic growth, faster inflation and higher unemployment.

The Chancellor’s measures, including a freeze on income tax thresholds which will leave 1.7 million people paying more, take the tax burden to an all-time high according to the Office for Budget Responsibility (OBR).

The tax hikes come in response to downgraded economic forecasts but also increased welfare spending because of the abolition of the two-child benefit cap and the Labour revolt over attempts to curb the benefits bill.

Ms Reeves also used some of the tax take to build herself a bigger buffer against her borrowing rules.

But she also spent some of it on scrapping the two-child limit for universal credit – a measure to ease child poverty warmly welcomed by Labour MPs but costing £3 billion a year by 2029/30.

Measures to save £150 from the average household energy bill will cost £3 billion next year and an average £2 billion in the following two years.

In an unprecedented blunder, full details of Ms Reeves’s plans were published by the OBR more than half an hour before she stood up in the Commons chamber.

The budget watchdog forecast gross domestic product would grow by 1.5% this year, an increase from its earlier 1% forecast.

But it downgraded growth in 2026 from 1.9% to 1.4%, in 2027 from 1.8% to 1.5%, in 2028 from 1.7% to 1.5% and in 2029 from 1.8% to 1.5%.

The OBR said the Budget “raises taxes by amounts rising to £26 billion in 2029/30, through freezing personal tax thresholds and a host of smaller measures”.

The freeze in thresholds will result in 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers in 2029/30 as earnings rise over time. Scotland has a separate income tax system.

People are dragged into paying 20% income tax if their earnings rise above £12,570, with the 40% rate from £50,271 and the 45% band from £125,140.

The freeze in income tax and national insurance contributions, which will extend until 2030/31, will rake in £8.3 billion for the Exchequer in 2029/30.

Ms Reeves acknowledged the freeze in tax thresholds would hit “working people” – the group Labour had promised to protect – but she was “asking everyone to make a contribution”.

“I can keep that contribution as low as possible because I will make further reforms to our tax system today to make it fairer and to ensure the wealthiest contribute the most,” she said.

That includes raising £4.7 billion through charging national insurance on salary-sacrificed pension contributions and £2.1 billion through increasing tax rates on dividends, property and savings income by two percentage points.

She confirmed a new mansion tax, a “high value council tax surcharge”, of £2,500 for properties in England worth more than £2 million, rising to £7,500 for those worth more than £5 million.

The combination of new announcements on top of existing measures means that tax as a share of the economy – the tax-to-GDP ratio – will “increase to an all-time high of 38.3%” in 2030/31, the OBR said.

The Chancellor said the downgraded growth forecasts were “the Tories’ legacy, not Britain’s destiny” after the OBR lowered its expectations for productivity growth by 0.3 percentage points.

Ms Reeves’ announcements increase spending every year, with the cost amounting to £11 billion in 2029/30 “primarily to pay for the summer reversals to welfare cuts and lift the two-child limit in universal credit”, the OBR said.

At a press conference in a London hospital following the Budget, Ms Reeves insisted the threshold freeze did not breach Labour’s manifesto commitment not to increase income tax or national insurance.

She said: “In the manifesto, we were very clear it was the rates of income tax, national insurance and VAT. But I’m not going to get into semantics. I recognise that we are asking people to contribute more by freezing those allowances.”

Ms Reeves declined to rule out coming back for more taxes, telling reporters she “can’t write future budgets” but would not put the public finances at risk.

Budget announcements included:

– The amount of headroom against the Chancellor’s rule of meeting day-to-day spending through revenue not borrowing will widen to £21.7 billion in 2029/30, almost £12 billion more than in March.

– “Permanently lower” business rates will be introduced for more than 750,000 retail and hospitality businesses, including shops, pubs and cinemas, by hiking rates on properties worth more than £500,000, pointing to the warehouses of “online giants” as an example.

– The tax on online betting will be raised from 21% to 40% next year.

–  The annual cash Isa limit will be reduced from £20,000 to £12,000.

– A promise of a further £4.9 billion in government efficiency savings by 2031.

– The 5p cut in fuel duty will remain in place until September 2026, when it will be reversed through a staggered approach.

– Drivers of battery electric cars will be hit by a 3p per mile tax from April 2028, with the charge to rise annually with inflation.

– Compensation payments from the infected blood scheme will be exempted from inheritance tax.

– Debt will rise from 95% of GDP this year to 97.0% by 2027/28 before falling to 96.8% the following year.

– Consumer Prices Index inflation is forecast to be 3.5% this year, higher than the 3.2% forecast in March, and 2.5% next year, higher than the 2.1% previously forecast, before settling at 2%.

– Unemployment is also forecast to be higher than previously forecast until 2029, peaking at 4.9% or 1.8 million next year.

Conservative leader Kemi Badenoch said the Budget was a “total humiliation” for Rachel Reeves and “if she had any decency she would resign”.

The OBR’s assessment of the economy and Ms Reeves’s plans was not meant to be released until after the Chancellor had delivered her Budget in the House of Commons.

But it was published on the Budget watchdog’s website early, the latest in a series of leaks and early disclosures in the run-up to Ms Reeves’s statement.

The OBR apologised, blaming a “technical error”.

Shadow chancellor Sir Mel Stride said it was an “utterly outrageous” leak of market-sensitive information, which could constitute a criminal act.

Ms Reeves said it was “deeply disappointing” and a “serious error on their part”.

But her spokesman said she still had confidence in OBR chief Richard Hughes.

Mr Hughes said an investigation had been launched, adding: “We understand how it happened but we want to get to the fundamental causes and make sure it doesn’t happen again.”

The investigation will report to the OBR’s oversight board, the Treasury and the Commons Treasury Committee and Mr Hughes said he would “abide by the recommendations” – including if they suggest he should quit.