Economic Watch: UK budget brings 50-year record tax hike in pursuit of stability

by Xinhua writers Zheng Bofei, Larry Neild

LONDON, Oct. 31 (Xinhua) -- The British government unveiled its much-anticipated budget on Wednesday, aiming to bring more certainty to the country's economy through increased borrowing and one of the largest tax hikes in five decades.

Market reactions were mixed: Britain's domestically-focused FTSE 250 index rose by 1 percent initially after Chancellor Rachel Reeves' address before leveling out. Meanwhile, the 10-year gilt yield hit a high of 4.362 percent, indicating concerns about government debt and spending, though some economists suggested the global interest rates might be influencing the rise more than domestic policy.

Giles Wilkes, a senior fellow at the Institute for Government, noted the reaction was relatively mild compared to the 2022 market chaos triggered by then-Prime Minister Liz Truss's mini-budget, which ultimately forced her resignation. "This time, there's nothing that would prompt markets to veto the government's plans," he said.

HIGHER TAXES

In her address, Reeves emphasized the government's commitment to increasing tax revenue by 40 billion pounds (51.8 billion U.S. dollars), primarily targeting wealthier households.

Starting in April 2025, Employer National Insurance contributions will rise by 1.2 percentage points to 15 percent, while the salary threshold for contributions will drop from 9,100 pounds (11,785 dollars) to 5,000 pounds (7,475 dollars), generating an additional 25 billion pounds (32.4 billion dollars) by 2029-2030.

"While this may affect businesses initially, economists agree it could ultimately impact employee wages as employers absorb the higher tax burden," Steve Nolan, an academic economist from Liverpool John Moores University, told Xinhua.

Additionally, the budget abolishes the non-dom tax regime in favor of a residence-based system. Capital gains tax rates will increase from 10 percent to 18 percent for the lower rate and from 20 percent to 24 percent for the higher rate, while rates for residential property remain unchanged. The freeze on inheritance tax thresholds was extended to 2030, with anticipated additional revenue of over 2 billion pounds (2.6 billion dollars).

LONG-TERM VISION

Reeves highlighted Labour's goal for sustainable growth, adhering to a "stability rule" that aims to balance the budget by 2029-2030. The Office for Budget Responsibility (OBR) indicated that the fiscal plan is likely to meet these objectives, projecting budget surpluses beginning in 2027-2028.

In its Economic and fiscal outlook for October 2024, the OBR estimated that approximately half of this spending will be funded through tax increases, bringing tax revenue to a record 38 percent of GDP, while the rest will require 32 billion pounds (41.4 billion dollars) in additional annual borrowing. Although this fiscal approach is expected to boost GDP growth, with projections of 2 percent for 2025, it may limit private-sector growth in the medium term.

"The government faces a delicate balancing act," said Nolan. "Growth projections show a temporary boost in GDP but settle at a tepid 1.5 percent average growth rate from 2028 onward, which is far below the 2.5 percent rate needed to improve living standards."

As Reeves stated in a post-budget interview, "This is not the summit of my ambition." With a long-term fiscal strategy now set, the government's ability to navigate economic challenges and maintain public confidence and certainty will remain under close watch for the next five years or even longer. ■