Rachel Reeves has acknowledged that workers could see lower pay rises as a result of her Budget, while market jitters saw the cost of Government borrowing rise in response to the Chancellor’s spending spree.
Ms Reeves acknowledged her decision to raise national insurance contributions (NICs) for employers could affect wage growth for private sector workers as companies seek to pass on the cost of the tax rise.
Meanwhile the scale of extra borrowing – around £32 billion a year on average – saw yields on government bonds increase as the market responded to the Chancellor’s plans.
The Budget increased state spending by almost £70 billion per year – a little over 2% of gross domestic product (GDP) – funded by increased taxes and borrowing.
The main tax rise was the £25.7 billion change to employers’ NICs, although the actual amount of money raised for the Exchequer will be around £16.1 billion by 2029/30 as firms curb wage rises, cut hours and reduce profits while public sector employers get compensation in their budgets for the change.
Economics experts branded the increase a “tax on working people” which will “definitely” show up in their wages.
Asked about the consequences of the move, the Chancellor told the BBC: “I said that it will have consequences.
“It will mean that businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been.”
Ms Reeves also said she did not want to repeat the £40 billion of overall tax rises she implemented in her first Budget “ever again”.
Choices made by the Chancellor will see the overall tax burden reach a record 38.3% of gross domestic product (GDP) in 2027-28, the highest since 1948.
The Office for Budget Responsibility (OBR) forecasts that by 2026-27, some 76% of the total cost of the NICs increase is passed on through lower real wages – a combination of a squeeze on pay rises and increased prices.
The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the watchdog said.
Ms Reeves later suggested the tax rise was not an easy choice, saying: “Look, what alternative was there? We had a £22 billion black hole in the public finances.”
The Chancellor insisted ministers had “protected the smallest businesses” from the tax rise, and had stood firm on Labour’s promise not to raise the key taxes on “working people” – employee NICs, income tax and VAT.
Ms Reeves plans to pour more public cash into schools, hospitals, transport and housing – and will change the way government debt is measured to allow her greater borrowing flexibility.
“This Budget was to wipe the slate clean after the mismanagement and the cover-up of the previous government,” Ms Reeves told Times Radio.
She added: “I had to make big choices. I don’t want to repeat a Budget like this ever again, but it was necessary to get our public finances and our public services on a stable trajectory.”
Shadow Treasury chief secretary Laura Trott said: “Rachel Reeves confirmed… that her Budget will hit pay for workers.
“This follows from (the) OBR saying household income will fall by 1.25%, and inflation will be pushed up because of the decisions in Labour’s Budget.
This is definitely a tax on working people, let’s be very clear about that
“This is the Budget Labour planned all along but were not honest about at the election.
“And it’s no wonder, the effects of it are far worse than even we predicted during the campaign.”
James Smith, research director at the Resolution Foundation economic think tank, said: “This is definitely a tax on working people, let’s be very clear about that.
“Even if it doesn’t show up in pay packets from day one, it will eventually feed through to lower wages.”
The OBR has predicted the Government’s spending measures will provide a temporary boost to GDP.
But the watchdog forecast downgrades in subsequent years, and said the Budget measures will add to pressure on inflation and interest rates.
Paul Johnson, director of the influential economics think tank the Institute for Fiscal Studies (IFS), warned Ms Reeves may have to come back for “another round of tax rises in a couple of years’ time – unless she gets lucky on growth”.
Meanwhile, the International Monetary Fund (IMF) endorsed the investment and spending on public services in the Chancellor’s Budget, as well as sustainable tax rises.
In an unusual move, the Washington-based watchdog said: “We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue.”
But the verdict of the IMF appeared not to reassure financial markets.
The yield – or interest rate – on a 10-year gilt, an indicator for the cost of state borrowing, hit 4.568% on Thursday afternoon, the highest point since August 2023, while the pound also weakened against the dollar.
Laith Khalaf, head of investment analysis at AJ Bell, said: “Markets are especially sensitive to the effect chancellors can have on interest rates ever since Kwasi Kwarteng took to the despatch box, and with the 10-year gilt yield now climbing to levels seen in the wake of the mini-budget, it’s fair to ask whether Rachel Reeves’ maiden Budget could cause similar problems.
“The answer is probably, and hopefully, not.”
But the market reaction could have a knock-on impact for homeowners, he said: “Based on what’s happened to the two-year gilt, we might start to see mortgages creeping up again, just when borrowers thought we were on a firmly downward path.”
The Chancellor was asked if she was worried that the country could be heading for a “Liz Truss situation”.
“The number one commitment of this Government is economic and fiscal stability which is why we put in place yesterday in the Budget robust fiscal rules that we will meet two years early,” she told Bloomberg TV.
A Downing Street spokeswoman said: “It’s a matter of Government policy not to comment on market fluctuations.”
But Tory leadership hopeful Robert Jenrick said: “Reeves promised stability, but her gloom-and-bust Budget has sent borrowing costs soaring and the pound falling.”
