Rachel Reeves admits tax-hiking Budget may impact pay for workers
Rachel Reeves acknowledged the impact of her historic Budget, saying she hopes never to have to repeat tax rises, as ITV News Political correspondent Shehab Khan reports
Chancellor Rachel Reeves has admitted that her tax-hiking Budget could impact workers' earnings as pay rises "may be weaker".
The chancellor told ITV News she "absolutely accepts" that her decision to raise national insurance contributions by 1.2 percentage points to 15% for employers could affect wage growth for private sector workers.
She also stressed the importance of protecting smaller businesses from the Budget changes.
"I absolutely accept that wage growth may be weaker than it otherwise would have been, but I was really clear to protect smaller businesses from the changes that I made yesterday," she said on Thursday.
"So any business employing, for example, workers on the National Living Wage won't pay any national insurance next year because of the changes that we've made to the Employment Allowance."
She added that "a million" of Britain’s smallest businesses will pay the same or less in national insurance.
"I'm pleased to have been able to support small businesses in this way, but I do recognise that the insurance contributions for employers will have an impact."
Despite Labour’s promises to protect “working people”, a £25.7 billion increase in national insurance contributions paid by employers is likely to also lead to job losses.
The overall tax burden will reach a record 38.3% of gross domestic product (GDP) in 2027-28, the highest since 1948 as the UK recovered from the impact of the Second World War.
Reeves described the hike in national insurance contributions as the "hardest decision" she made in the budget.
She explained: "I had two decisions to make in the Budget. The first of all was whether I was going to be a responsible chancellor or not, be open and transparent and put our public finances on a firm footing. I did that yesterday.
"The second was how to raise the taxes that were needed to put our public finances and our public services on a firm footing.
"I didn't want to increase the direct taxes that working people pay, so I have asked businesses and the wealthiest in our country to pay a bit more. I recognise that that will have consequences beyond business, but I think those are the right decisions in the circumstances that I faced."
The tax hikes and increased borrowing allow Reeves to provide a £22.6 billion increase in the day-to-day health budget as well as a £3.1 billion increase in the capital budget, which she called the “largest real-terms growth in day-to-day NHS spending outside of Covid since 2010”.
'The growth forecasts are certainly not the summit of my ambition,' says the chancellor.
Reeves also said Labour’s first Budget since 2010 would be a one-off to “wipe the slate clean” and pledged to "invest, invest, invest", but the head of the influential economics think tank the Institute for Fiscal Studies (IFS) warned that more tax rises could come if Labour’s planned growth does not materialise.
Speaking to ITV News Political Editor Robert Peston following her first Budget, the chancellor admitted that the "growth forecasts today are certainly not the summit of my ambition".
"This is the first Budget of this parliament, is there more to do? Absolutely."
Capital gains tax to go up by £2.5 billion, with the lower rate to rise from 10% to 18% and the higher rate from 20% to 24%.
Changes to inheritance tax, including bringing pension pots within the tax from April 2027, and reducing reliefs for agricultural and business property, raising a total of £2 billion a year.
Income tax thresholds will rise in line with inflation from 2028-29, reducing the impact of “fiscal drag” where rising wages see people pulled into higher tax bands.
The freeze on fuel duty will continue, including maintaining the existing 5p cut.
Draught duty will be cut by 1.7%, knocking a penny off a pint in the pub, but other alcohol rates will increase.
The stamp duty land tax surcharge for second homes will increase by two percentage points to 5% from Thursday.
Sir Keir Starmer sidesteps questions about whether he misled the public over tax rises
Put to the prime minister that his popularity has dropped dramatically since the general election perhaps due to the tax hikes, Sir Keir Starmer insisted the difficult choices made in the Budget were necessary to restore economic stability.
"I came into politics relatively late in my life having done other things. I came in with one purpose only and that is to change lives for the better. We made key choices yesterday in relation to the future of our country."
Pressed that those choices weren't in the manifesto, the prime minister insisted they inherited "a very badly damaged economy", adding: "We audited the books and found £22 billion missing, we've had to do the responsible thing which is to stabilise the economy to make sure we're putting in the investment for the future. That's what matters to me."
Jeremy Hunt says families will 'bear the brunt' of Reeves' taxation
Speaking on Good Morning Britain on Thursday, Shadow Chancellor Jeremy Hunt criticised Reeves for "taking the easy route" by raising taxes.
"The result of these rises in taxation will be lower growth, lower living standards, and it’s ordinary families that bear the brunt," he said.
When asked whether raising taxes would result in better public services, he replied: "I would always welcome more money for the NHS and we all want it to get back on its feet.“But there are choices in how you decide to do that and she (Rachel Reeves) took the easy route – which is to pick the pockets of businesses.”
IMF welcomes the Budget
The International Monetary Fund (IMF) has endorsed the chancellor's budget after urging in April that the government needed “to address fundamental imbalances between spending and revenues”.
In a statement on Thursday, the IMF said: "We welcome the budget's focus on boosting growth through a needed increase in public investment while addressing urgent pressures on public services."
It stated that it supported Labour's proposed reduction in the deficit over the medium term.
Office for Budget Responsibility (OBR) says it will only provide a temporary boost to GDP
The OBR's forecast today suggests that the budget's spending increase will only temporarily boost GDP, calling it a "sugar rush."
The chancellor has also changed the way government debt is measured allowing her greater flexibility to borrow, the OBR described it as “one of the largest fiscal loosenings” in recent decades.
The OBR’s forecast suggested the increase in spending would provide a temporary boost to GDP, but predicted downgrades in subsequent years, and said that the Budget measures would add to pressure on inflation and interest rates.
The latest OBR forecasts indicate that inflation will rise to 2.6% in 2025 – significantly above the 1.5% rate previously predicted – “partly due to the direct and indirect impact of the Budget”.
Higher rates on employers’ national insurance contributions (NICs) and a lower starting threshold will raise £25.7 billion by 2029-30.
The OBR forecasts that by 2026-27 some 76% of the total cost will be passed on through lower real wages – a combination of pay cuts and increased prices.
The rate will increase by 1.2 percentage points to 15% from April 2025, with payments starting when an employee earns £5,000, down from the current £9,100.
The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the watchdog said.
Reeves 'may need to raise taxes again in a few years'
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said she may need to raise taxes again in a few years if extra borrowing in the Budget does not lead to increased growth.
He added: “The first gamble is that a big cash injection for public services over the next two years will be enough to turn performance around, and that many of the temporary spending pressures won’t persist.
“If she’s wrong about that, and spending pressures don’t dissipate after two years, then to avoid cutting unprotected areas she may well need to come back with another round of tax rises in a couple of years’ time – unless she gets lucky on growth.”
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