Rachel Reeves will deliver the first Labour budget in 14 years on Wednesday after weeks of speculation over tax increases, changes to the government’s debt rules and a promise to bring an end to austerity.
The chancellor has said she will focus on three priorities: protecting working people, fixing the NHS and rebuilding Britain. However, the government has warned the public to expect “painful” decisions because of what Labour has termed a dire economic inheritance left by the Conservatives.
Here are five key charts that will underpin the chancellor’s budget:
Stronger economic growth this year
Britain’s economy was the fastest-growing in the G7 in the first half of this year, helped by cooling inflation, as it bounced back from a shallow recession in the second half of 2023 triggered by the cost of living crisis.
Labour’s central mission is to reboot the economy, with an ambition to hit the highest sustained growth rate in the G7 over consecutive years by the end of the parliament.
While growth beat expectations earlier this year, it has slowed in recent months as households remain under pressure from elevated interest rates. However, economists say it is clear that the Office for Budget Responsibility (OBR) will upgrade its growth forecasts for this year. In March the OBR forecast that growth would be 0.8% this year, before rising to 1.9% in 2025 and 2% in 2026. The consultancy Capital Economics expects an upgrade to 1% this year. However, City analysts expect growth could be revised a touch lower in future years.
Inflation has cooled by more than anticipated in recent months, dropping below the Bank of England’s 2% target in September. Financial markets expect Threadneedle Street to cut interest rates from 5% at present to as low as 3.75% by the end of next year.
New rules for national debt
Reeves will rewrite the Treasury’s self-imposed fiscal rules to allow for higher borrowing for investment in infrastructure, which could form the most radical plank of her budget.
It is expected she will use an alternative debt metric to meet a target for debt to be falling as a share of the economy in the fifth year of OBR forecasts. The chancellor is thought to have settled on a measure known as public sector net financial liabilities (PSNFL), which takes into account financial assets, including student loans and company shares, alongside government debts.
In the March budget, Jeremy Hunt, her predecessor, left headroom of just £8.9bn against his debt target. Using PSNFL would have meant an extra £53bn, according to the Institute for Fiscal Studies.
Reeves is expected to stop short of choosing a wider definition, public sector net worth, which also takes account of physical assets, including schools, hospitals, roads and railways and could add an extra £58bn of headroom.
The chancellor has been at pains to avoid spooking financial markets, insisting there will be “guardrails” to ensure public money is spent wisely. She is also unlikely to use all of the additional headroom unlocked by the change.
Infrastructure investment boost
The chancellor has said her budget will place investment at its heart as the key ingredient for powering future economic growth.
Public and private investment in the UK economy has lagged behind comparable rich countries for decades, particularly since 2010. Experts say this is among the reasons for Britain’s crumbling infrastructure and the sluggish economic performance of the past 15 years.
Labour inherited Tory budget plans for public infrastructure investment to fall as a share of the economy, from 2.4% of GDP in the current financial year to 1.7% by 2028-29. To avoid this, the IFS estimates a top-up of £24bn would be required.
Reeves could use some of the headroom within her new fiscal rules to halt the decline. The government will spell out some details for the next financial year at the budget, with possible decisions on projects such as HS2, before a full 10-year infrastructure strategy next spring.
Tax increases
Keir Starmer warned in his pre-budget speech on Monday that Labour would “embrace the harsh light of fiscal reality”, teeing up billions of pounds’ worth of tax increases in the budget.
Reeves has spoken of the need to address a £22bn “hole” in the public finances that Labour says was covered up by the Tories. The chancellor has warned cabinet colleagues the shortfall will persist to the end of the parliament, requiring tax rises and spending cuts worth as much as £40bn.
Labour promised before the election not to increase taxes on “working people”, including through income tax, national insurance contributions (NICs) and VAT, alongside a pledge not to raise the rate of corporation tax. This has left the chancellor targeting alternative measures, including levies on wealth, such as capital gains tax, pensions relief and inheritance tax.
Reeves has hinted that taxes on business will rise, including a mooted increase in employer NICs. However, she risks being accused of playing fast and loose with Labour’s definition of “working people”. Economists warn the costs could be ultimately passed on to workers in the form of lower wages.
The chancellor could also extend a freeze on personal tax thresholds first introduced by the Tories. Known as “fiscal drag”, it deprives workers of an annual inflation-linked rise in their tax-free personal allowance and drags more people into higher income-tax brackets.
Ending austerity?
As the flip side of higher taxes, spending will also rise. Labour has promised “no return to austerity” despite having to take “difficult decisions” on some areas of expenditure, welfare and tax.
The government is expected to outline a 4% real-terms increase in NHS funding, significantly higher than that earmarked by the last government.
In March the Tories outlined a 1% real-terms increase in day-to-day spending for the next five years. However, after accounting for ringfenced departments – including the NHS, defence, schools and foreign aid – unprotected areas, including councils, courts, further education, and prisons, faced a sharp real-terms cut.
The IFS expects that Reeves can just about avoid real-terms cuts to unprotected departments. But after years of deep cuts to funding in some areas, and with services under intense pressure, she could choose to go further by increasing funding in line with national income. This would require £25bn of tax increases to “end austerity”.
