Reeves Spends Billions Just to End Up With Sluggish UK Growth

Chancellor of the Exchequer Rachel Reeves delivered a massive package of tax hikes alongside plans to ramp up public investment in a historic first budget that aimed to revive the UK economy — but fell short of delivering a major boost to its growth prospects.

Her strategy mixes pain in the form of £41 billion of annual tax increases by the end of the decade with a longer-term plan to invest in capital projects fueled by £142 billion of extra borrowing over five years.

While Labour’s defining mission is to fuel greater growth, projections from the Office for Budget Responsibility suggest mixed results, with Reeves’ measures leading to a better outcome over the next two years than previous Tory plans, and a lower impact on real economic output thereafter.

Where Will Labour Find the Money?

The bulk of the additional tax take came from a rise in the national insurance payroll tax for employers, with big contributions from increases to capital gains tax and inheritance tax.

Reeves kept day-to-day departmental spending under control, opting for a 1.5% real terms increase from 2024/25 onwards.

She also made savings, cutting about £4 billion from welfare spending in 2029/30 by reducing fraud and errors on benefit claims. Measures to collect more tax that’s due and clamp down on avoidance are projected to rake in £6.5 billion a year by then.

The chancellor said her main fiscal rule will be to ensure day-to-day spending is funded by revenues — and pledged to borrow only to invest.

The additional tax raised enabled her to plow £22.6 billion more into the National Health Service budget next year, raise defense spending by £2.9 billion, and protect other government departments from the extent of real-terms cuts to their funding that were penciled in by the previous Conservative administration.

The net effect of Reeves’ tax and spending plans leaves her hitting her main fiscal rule with a margin of £9.9 billion to spare in the last year of the current parliamentary term. That compares with the £8.9 billion of headroom her Tory predecessor Jeremy Hunt had in March against his — different — headline rule.

Reeves also gave herself more space to borrow to invest by changing the debt measure targeted by the government under its other principal fiscal rule, to have debt falling as a share of the economy.

The government is now targeting public sector net financial liabilities, a measure which captures the value of assets created alongside the cost of any investment, rather than the previous measure of public sector net debt excluding the Bank of England.

Changing that gave her headroom of £15.7 billion — rather than the shortfall of £5.8 billion she would have had using the old metric. That new fiscal space comes even after she increased planned capital spending by a cumulative £100 billion over five years.

Reeves said that she would have “guardrails” around the use of public money, as she sought to allay concerns that the government would go on a borrowing spree, but underlined that her investment plans were needed to “rebuild our country.”

Impact on the UK’s Finances

Reeves’ extra borrowing plans mean that debt (excluding the Bank of England) is projected to rise to almost 96% of GDP in five years’ time, up from the estimate in March.

She’s using that extra borrowing to stave off the decline in public investment implied by Tory plans. Under Hunt, public investment was due to decline to 1.7% of GDP by 2029 from 2.6% this year. Under Reeves’ plans, public investment will see a markedly smaller decline to 2.4% by 2030.

Reeves said the investment would go into projects such as hospitals, extra prison places and schools. She also confirmed that the HS2 rail project will reach the London Euston station rather than stopping short on the outskirts of the capital.

The impact of Labour’s budget is to boost GDP by almost 0.6% next year before the measures become a small drag by 2029/30, according to the Office for Budget Responsibility. The OBR said this is due to public investment crowding out private firms and the hike in employer national insurance contributions hurting the worker participation rate.

“The only way to drive economic growth is to invest, invest, invest,” Reeves said in the House of Commons on Wednesday. “There are no shortcuts and to deliver that investment, we must restore economic stability and turn the page on the last 14 years.”