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Tax increases and new financial policies from the UK government

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Tax increases and new financial policies from the UK government

British Prime Minister Keir Starmer, his Chancellor Rachel Reeves and the entire new Labor government together received their well-deserved share of discontent on Thursday morning, October 31, in “certain newspapers”, and indirectly from the richest taxpayers .

The day before, Chancellor Reeves announced future tax increases in the United Kingdom. The draft budget presented on Wednesday calls for more than £40 billion in additional revenue each year through increases in taxes and contributions.

Rachel Reeves, who presented the new Labor government’s first budget proposal in the British House of Commons following the upcoming parliamentary elections in July, said that the seriousness of the public finance situation inherited from the previous Conservative government should not be underestimated.

Shortly after the election, Chancellor-designate Reeves announced that the Conservatives, who had gone into opposition after 14 years in power, had left more than £22 billion of unfunded public funds in the public purse and that it would be necessary significantly increase income for the balance sheet.

Wednesday’s draft budget, anticipated by markets and London think tanks, calls for an average annual increase in taxes and contributions of £41.1 billion over the forecast period to 2029/2030.

The biggest element of the package to boost Treasury revenue was a 1.2 percentage point increase in social security payments paid to the National Insurance Scheme (NICS) by employers. In effect, Reeves simply reversed the “unfunded” 2% cut to Workers’ National Insurance that was introduced by the Conservatives.

This measure alone is expected to generate £25 billion in additional annual revenue for the Labor government in the next financial year, which begins in April 2025.

Under Reeves’ program, the tax on profits from the sale of securities will increase from 20 to 24%, while the excise tax on tobacco products will increase 2 percentage points above the current inflation rate.

UK Prime Minister Sir Keir Starmer has repeatedly said “painful” measures will be needed in the next budget to close the tens of billions of pounds funding gap inherited from the Conservative Party government.

The UK’s public debt to gross domestic product (GDP) ratio is now approaching 100%, according to the latest figures from the UK Office for Statistics (ONS).

The ONS highlighted that the last time the debt burden in the public finance sector was at similar levels was in the early 1960s.

The Office for Budget Responsibility (OBR), which produces official macroeconomic and public finance forecasts for the British government, recently produced a modeling study suggesting that, unless there is a significant adjustment in public finance policy, the The government’s ratio of UK debt to GDP will rise to 274% by the end of the decade and more than 300% thereafter.

During the last election campaign, Labor, as always, denied raising taxes. However, the accounting reports turned out to be worse than they thought; This became a softening argument for Labor when they decided to do something drastic: increase taxes.

In fact, the Labor Party is going to do exactly the opposite of what was envisaged in the Prime Minister’s infamous mini-budget on public finances. Liz Truss and his chancellor Kwasi Kwartenga Two years ago. His tax reduction program led to the lightning fall of the Truss cabinet.

As is known, Truss and Kwarteng then rejected an offer from the Office for Budget Responsibility (OBR) to produce a financial forecast, and Truss later even decided that the OBR proposal was part of a “deep state” plot against her mandate as prime minister.

This time the OBR carried out a comprehensive 10-week audit of both the public finances and all of Reeves’ planned tax and spending policies. Due to this, the preliminary budget preparation schedule was extended for almost three months.

Business leaders believe they can handle the tax increases, but lingering uncertainty over government decisions has begun to weaken economic sentiment. Some in business circles believe that after three years of continuous crises, the opportunity to take advantage of the crucial summer period, when a new stable government emerged and interest rates finally fell, has now been lost.

A new monetary policy with lower interest rates and higher taxes, plus borrowing restrictions, appears to be the new normal for UK financial policy.

The downside to Reeves’ planned tax increases would be relief for struggling users of many government services. Labor hopes it will bring calm to financial markets so they can embark on a long-term investment program in the UK’s economic future. This is already a socioeconomic strategy.

Chancellor Reeves defines austerity as real cuts across all government departments. A new rule regulating the attraction of borrowed funds exclusively for investments – the so-called. The “investment rule” will replace the previous “debt rule.” This means that under the Labor Party, all day-to-day public spending, welfare and interest payments will have to be funded by tax revenue over a period of time. Loans will be made only for investments.

According to Reeves, this rule will collectively determine not only the current budget, but also future budgets, influencing every shilling and penny the British government spends.

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