Wednesday, November 6, 2024

Analysis-UK’s Reeves bets big on tax-and-spend to reset economy

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By Kate Holton

LONDON (Reuters) – British finance minister Rachel Reeves’ first budget marks a huge gamble that she can quickly rebuild the country with the tens of billions of pounds she has raised in taxes, and withstand the anger of businesses charged with funding it.

Reeves and Prime Minister Keir Starmer have struggled with a series of distractions since being elected in July, and the first woman to be British chancellor was under pressure to explain how she could hike taxes to upgrade public services without stunting growth.

In the end, she announced 40 billion pounds ($52 billion) of tax rises, the biggest increase in three decades, and relaxed debt rules to borrow more for investment.

Insisting she was keeping a left-leaning pledge to spare “working people”, she directed much of the tax rises at companies, and she also targeted the wealthy, imposing higher rates on areas such as inheritance, capital gains, second homes, private jets and private schools.

Reeves had spent years courting big business, pledging to provide political and regulatory stability, and to work with them to simplify planning rules to help companies grow, in the hope that workers would also benefit from higher salaries.

But they have complained that they will not be able to invest in their operations, and give productivity a much-needed boost, if they have to spend on higher taxes and wages too.

Reeves told parliament she had no choice, saying she had inherited broken public finances and broken public services.

“We are asking business to contribute more,” she told parliament. “Successful businesses depend on successful schools. Healthy businesses depend on a healthy NHS. And a strong economy depends on strong public finances.”

A senior Labour lawmaker said the party hoped that by bundling the “bad news” in the first budget, the government could then oversee a return to stronger economic growth that would fuel an improvement in public services and lead to an unwinding of tax rises in future fiscal statements.

If that economic growth fails to appear, the Labour government could find itself in deeper trouble.

A budget watchdog said the economy was expected to grow by less than previously forecast between 2026 and 2028 after outperforming only slightly in 2024 and 2025.

MODERN BRITAIN

Labour was elected in July, bringing an end to 14 years of often chaotic Conservative rule, and tasked with modernising British infrastructure and public services, all while hemmed in by high levels of debt and sluggish economic growth.

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