John Healey hit workers, savers, landlords and banks today as he drove the tax burden to a new record high to fund cost-of-living giveaways.
The Chancellor hailed a Budget for the ‘working people of Britain’ as he tried to balance the books amid the Middle East crisis and Andy Burnham‘s spending ambitions.
But while the Government talked up support for spiralling living costs, the help will be mostly targeted. It will be funded partly by letting borrowing go up more than previously expected, as well as through smaller raids and the long-running ‘stealth’ assault of frozen tax thresholds.
Mr Healey is hiking rates of tax on income from property and savings by a further two percentage points from April next year.
It comes on top of an increase of the same size imposed by predecessor Rachel Reeves, due to take effect at the same time.
The Treasury’s OBR watchdog said these steps along with measures over the past decade that have reduced private landlord returns ‘collectively risk leading to a steady rise in rents’.
The body now expects revenues from income tax and national insurance to be £17.4billion a year higher by 2030-31 than it predicted only in March. As a proportion of GDP the tax take will reach 38.6 per cent by 2031-32.
That is despite living standards being set for another grim period of stagnation.
The OBR also said welfare costs are set to keep rising, with no sign of a move to reform the system soon. Kemi Badenoch accused ministers of being ‘addicted to welfare’.
The Chancellor said homes in council tax bands A-D will get a £100 payment to help with energy bills, worth £2.6billion.
The stripping of VAT from electricity bills is being continued until July, although that will be swallowed up by a projected 27 per cent increase in the energy cap in the New Year.
Mr Healey signalled a longer-term move to strip green levies from energy bills and de-link the gas and electricity markets.
Earlier, consumer champion Martin Lewis was invited into Downing Street as Mr Healey announced that standing charges will be scrapped from gas bills. The MoneySavingExpert founder has long campaigned for the move.
However, the £108-a-year levies will not be removed until at least next year – and many bigger families will end up being worse off, as the costs will be moved on to unit costs for gas.
A scheduled fuel duty hike has been dropped to ease the suffering for motorists, with a freeze extended until at least July 2027.
The moves will be partly funded by a temporary rise in the bank surcharge, currently levied at 3 per cent on top of the 25 per cent corporation tax rate. It will rise to 6 per cent for 15 months from January.
Mr Healey has set aside £5.5billion to uprate benefits paid to 10million people by 3.5 per cent, in line with inflation.
He said two long-awaited welfare reviews will report next month, after reforms were kicked off until later in the Parliament. The bill will be brought down in a ‘Labour way’, he said, after Mr Burnham dismissed ‘crude cuts’.
In other developments today:
- The Defence Investment Plan is being ‘fully funded’ with an extra £4.7billion, and there will be a target of spending 3 per cent of GDP by 2030. But Mr Healey has delayed saying where the money will come from until the Spending Review next year;
- The threshold for small business rate relief is being lifted to £18,000 for retail hospitality and leisure businesses, paid for by tax rises on gambling;
- The OBR upgraded growth forecasts for this year from 1.1 per cent to 1.2 per cent, but trimmed forecasts from 1.6 per cent to 1 per cent;
- Labour is dropping Rachel Reeves’ plans to slash the cash ISA allowance from £20,000 following a backlash;
- Mr Burnham’s devolution drive will see all business rates retained locally by the end of the decade, with 20 per cent of revenue going to mayors from next year;
- Budget documents assume that the Rosebank oil project in the North Sea will be approved, despite resistance from ministers and Labour MPs;
- The minimum wage will be increased by 3.9 per cent from April, but Labour looks to have ditched the drive to equalise the rate for under-21s;
- Lowest-income pensioners will get a special tax allowance to prevent them being drawn into tax by the state pension rise in April;
- The PM has tried to quash Cabinet unrest over his bid to unwind Brexit, insisting he wants a ‘better deal for Britain’.
John Healey is delivering his first Budget pledging ‘breathing space’ for hard-pressed families – but will focus help on benefits claimants
The Commons chamber was packed for the long-awaited set-piece today
The tax burden is due to reach a record as a result of the freeze on thresholds
Spending on health-related and pensioner benefits are due to grow over the coming years
Mr Healey said: ‘Fiscal discipline is my first commitment as Chancellor. More than ever, it underwrites every promise this Government makes to the British people.
‘In the Budget today, I meet the fiscal rules – the stability rule, the day-to-day spending must be covered by tax receipts. And the investment rule, that Government debt, defined as public sector net financial liabilities, must be falling as a percentage of GDP.
‘This year, for the first time, I must meet these rules in the third year of the forecast, and I do.’
He said: ‘I am increasing the rates of tax on income from property and savings by a further two percentage points from April 2027, with no change to tax on income from dividends and tax on income from employment.’
Mr Healey confirmed he will reduce the UK’s fiscal headroom to £15billion in 2029-30, from a previous prediction of £26billion, after witnessing a jump in borrowing costs.
The weaker headroom, which will improve to £22billion by 2031, was linked to a £15billion jump in debt interest costs for the current year.
Government borrowing is expected to be higher than expected in every year of the latest forecast compared with previous predictions from March, the OBR said.
The OBR said it is expected to surpass previous forecasts by around £18 billion this year, £16 billion in 2027-28, and an average of £11billion a year after that.
Mr Healey stressed however that borrowing as a proportion to GDP is set to decline 4.2 per cent this year, dipping each year until 1.8 per cent in 2030-31.
The OBR said the tax take will be 0.2 per cent of GDP higher this year than anticipated in March, and 0.1 per cent of GDP higher in 2030-31.
Taxes as a share of GDP will go from 36 per cent in 2025-26 to 37.9 per cent in 2027-28, surpassing the previous historical high.
It will reach a peak of 38.6 per cent of GDP at the end of the forecast period in 2031-32 – 5.7 per cent of GDP above the pre-pandemic level of 32.9 per cent.
The peak had previously been estimated at 38.5 per cent of GDP.
Increases in income tax and national insurance contributions account for 1.6 per cent of GDP of this shift. The OBR said that reflected ‘forecast earnings growth, frozen personal tax thresholds until April 2031, and policy measures that raise self-assessment receipts’.
The watchdog laid out that income tax receipts are due to increase sharply this year.
‘This rise is driven by strong nominal earnings growth combining with frozen tax thresholds,’ it said.
‘Receipts are then forecast to rise to £610 billion (16.5 per cent of GDP) in 2030-31, before remaining broadly flat as a share of GDP in 2031-32 as thresholds return to being uprated by CPI from April 2031.
‘Almost all of this growth comes from higher PAYE income tax because it is a more progressive tax than NICs, and is therefore boosted by the freezes to tax thresholds.’
The OBR also warned that the threshold freeze is ‘likely to have an adverse effect on financial work incentives by increasing the marginal tax rate on each additional hour of work’.
‘Following our standard approach, we have estimated that, taken together, the threshold freezes in income tax and NICs from 2022-23 to 2030-31 could decrease labour supply by 215,000 in average-hours equivalent (AHE) terms by 2030-31.’
The Institute for Fiscal Studies (IFS) said the Budget had ‘a raft of fiddly measures but very little that will move the dial on growth’.
In an initial response, director Helen Miller welcomed the Chancellor’s ‘commitment to fiscal consolidation’ but warned that the plan ‘has an Achilles’ heel in the form of very tight plans for public service spending’.
Ms Miller also said: ‘The hodgepodge of tax increases and cuts will further complicate the tax system; in most cases it is hard to see a clear economic rationale.
‘Whether reductions in borrowing can actually be delivered depends heavily on public service spending plans, where growth is set to slow sharply after this year. History warns us to be sceptical of tight spending plans in later years of the forecast. Next year’s spending review will be a crunch point, and looks very tough for many departments, whose budgets will be squeezed by higher inflation forecasts.
‘The Chancellor is right that choices over priorities will need to be made. We should not underestimate the scale of the challenge. The plans for overall spending set out in the Budget mean that spending choices at next year’s spending review will be much harder than those made so far this Parliament.’
She continued: ‘There was a relatively small ‘breathing space’ package, relying on the outdated council tax system to provide one-off payment of £100 to around 80% of households in England, rather than just those on low incomes. Decisions to delay the rise in fuel duty and extend the ‘temporary’ cut to VAT on electricity until next July are unsurprising and there is a clear risk they won’t actually be temporary.
‘There were some decisions that were more important than their small scorecard effect suggests. The Chancellor announced plans to abolish standing charges for gas, pushing up per-unit prices instead. This moves prices in the right direction but in an ad-hoc way. On electricity markets the Chancellor signalled potentially welcome changes in direction on how policy levies are funded and the way future renewables capacity is procured. More worryingly, he also signalled an abolition of standing charges for electricity; if this were funded by higher per-unit electricity costs it would needlessly discourage electricity use and worsen existing distortions.
‘The Chancellor set out a balanced approach to devolving tax revenues to mayors – allowing areas to be rewarded for growth, but within guardrails that cap the biggest falls in funding by squeezing the most rapid growth. This sets a clear direction of travel and represents a real change in the financial stake that local areas have in economic growth.’
Mr Healey laid out the details of the Budget to the Cabinet this morning, before striking the traditional pose with his Red Box and team outside No11.
Ahead of the Commons set-piece, he acknowledged the country was facing a ‘difficult moment’ and promised changes would be made ‘responsibly’ within Labour’s fiscal rules.
He said: ‘Breathing space for today and fresh hope for the future. That’s what today’s Budget will deliver.
‘The world’s a highly uncertain place. Conflicts abroad are pushing up energy prices, and the cost of living here at home is piling pressure on families, on businesses, and on our public finances.
‘But Britain’s economy is showing real signs of resilience: investments up, productivity is growing, and we had the joint fastest growth in the G7 in the first half of this year.’
Britons are facing a grim few years of stagnating real household incomes, according to the OBR
Earnings growth is expected to be slightly faster in cash terms – but households face a darker picture after inflation is taken into account
John Healey invited consumer champion Martin Lewis into No11 this morning as he announced that standing charges will be scrapped from gas bills
The Institute for Fiscal Studies has suggested the OBR is likely to upgrade earnings forecasts amid higher inflation
John Healey struck the traditional pose with his Red Box and team outside No11, before heading to the Commons to unveil the crucial fiscal package
