The new British government, led by the Labour Party, said it would substantially raise taxes and borrow more for investment as it sought to steer the country out of a long run of economic stagnation.
Rachel Reeves, the chancellor of the Exchequer, delivered her first budget — and the first one ever by a woman — in Parliament on Wednesday. In a nearly 80-minute speech, Ms. Reeves announced about 40 billion pounds ($51.8 billion) in tax increases, more than half of which would come from higher taxes that employers pay on their workers’ salaries. She also increased capital gains and inheritance taxes.
“The choices that I have made today are the right choices for our country,” Ms. Reeves said. “That doesn’t mean these choices are easy.”
The budget was the first big opportunity for the Labour Party to set Britain’s economic agenda after it was swept into office with a large majority in July’s general election after 14 years out of power.
The budget has also been seen as a reset moment for the Labour Party, after its first few turbulent months in office. Keir Starmer, the prime minister, said this week that the budget would “light the way” toward the government’s priorities of ensuring financial stability, improving public services and encouraging investment.
For months, Ms. Reeves has warned that this budget would include “difficult” choices, signaling that Britons will have to swallow pain now for a bigger payoff later. These choices, government officials have said, will help the government achieve its goal of making Britain the fastest-growing economy in the Group of 7.
“This budget delivers one of the largest increases in spending, tax, and borrowing of any single fiscal event in history,” said Richard Hughes, the chair of the Office for Budget Responsibility, an independent watchdog.
Ms. Reeves increased public spending by £70 billion over the next five years, about half of which is paid for by higher taxes. The changes would take the tax burden — a measure of tax revenue as a share of gross domestic product — to the highest on record.
By the end of the decade, the increase in employer contributions to National Insurance, which funds state benefits including pensions, would raise more than £25 billion a year. About three-quarters of the cost will likely be passed on to workers through lower wages, Mr. Hughes said.
Still, Ms. Reeves showed some restraint in the face of pressure to inject a lot more cash into Britain’s struggling public services. She announced more money in the next few years, especially for teachers, defense and local authorities. But starting in 2026, day-to-day spending for government departments would grow on average 1.3 percent annually, after accounting for inflation, which analysts at the Institute for Fiscal Studies said would still leave some departments with very tight budgets.
At the same time, Ms. Reeves also set to increase public investment. She said that over the next five years, the government would increase capital spending by £100 billion to invest in projects, such as school buildings, hospital beds and diagnostics centers.
In all, Ms. Reeves’s measures will temporarily aid the economy but will leave its size “largely unchanged” in five years, the Office for Budget Responsibility said. It forecast slightly higher growth for this year and next, but said growth would then slow to below 2 percent a year. However, a sustained increase in public investment would raise the supply potential of the economy, which could increase long-term growth, the budget responsibility office said.
The budget is the first step in the Labour Party’s efforts to transform the British economy to make it more resilient, in what Ms. Reeves has called today’s “age of insecurity,” amid geopolitical conflicts and climate change.
“There are no shortcuts, and to deliver economic investment, we must restore economic stability and turn the page on the last 14 years,” Ms. Reeves said.
She accused the Conservative Party of “economic irresponsibility” for cutting taxes before the election and overspending, which led to a £22 billion “black hole” in public finances. Rishi Sunak, the former prime minister, said on Wednesday that the Labour Party broke its promise to not raise taxes on working people.
In an effort to avoid a repeat of the economic tumult that followed former Prime Minister Liz Truss’s “mini budget” two years ago, Ms. Reeves has vowed to stick to strict fiscal rules. Even as the government promised that there would be no return to austerity, day-to-day spending by government departments would have to be paid for by tax revenue by the end of this decade.
Ms. Reeves also said she would make sure debt levels would fall, but to allow more borrowing for investment, she changed the measure of debt that would be targeted to one that included the government’s financial assets. By that measure, debt would fall in three years.
As investors digested the budget announcement and the plans for more borrowing, yields on British government bonds rose. The 10-year bond yield climbed to 4.36 percent, the highest since the end of May.
“Adopting a broader measure of debt is a step in the right direction, and the more permissive fiscal rules will help allow more public investment,” Adrian Pabst, a deputy director at the National Institute of Economic and Social Research, said. But, he added, “the government has widened the fiscal straitjacket rather than throwing it off.”
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