The most recent budget, which was released on Wednesday, was unveiled by British Chancellor Rachel Reeves, which included significant tax increases projected to increase the public purse’s $ 36.4% by 2030.
The budget had been highly anticipated as a “make or break” moment for the UK’s governing Labour party, which has grappled with poor polling over the past year. The far-right Reform UK Party, which opposes immigration, would win control of the country if an election were to be held earlier this year, according to an opinion poll conducted by YouGov earlier this year.
The nation’s Office for Budget Responsibility (OBR) released its economic outlook as a result of the budget on its website two hours before the announcement, which is unusual for the country until afterward. Reeves called the blunder “deeply disappointing” and a “serious error”.
Reeves acknowledged that working people would suffer as a result of the tax increases, which are largely offset by the freezing of existing income tax thresholds, which means that more people will pay higher taxes as their incomes rise with inflation. This contradicts a fundamental commitment made by Labour’s manifesto prior to the general election last year.
“We are asking everyone to make a contribution”, Reeves told parliament.
She claimed, however, that the tax increases would help pay for the 28.9 billion pounds of fiscal headroom needed in five years. Reeves added that annual government borrowing would decrease. Borrowing in 2025-26 is expected to be 138.3bn pounds ($183bn), falling to 112.1 billion pounds ($148.3bn) the year after and to 67.2 billion pounds ($88.9bn) by 2031.
Reeves predicted a 20. 8 billion pounds ($28. 8 billion) surplus for the UK budget deficit for the fiscal year 2026/2027, while Reeves predicted a 24.6 billion pounds ($32.55) surplus for the year 2030/2031.
Reeves claimed that that will cover welfare expenditures and that there won’t be a “return to austerity measures.”
“I said there would be no return to austerity, and I meant it. Our investment in our economy and our national health service will continue with this budget. I promised to lower my monthly rent, and I did so. This budget will bring down inflation and provide immediate relief for families. Reeves remarked, “I committed to reducing debt and borrowing, and I did so.
What can we learn from this budget in five key ways.
1. Labor broke its promise to pay off the income of working people.
Reeves announced a one-time increase in taxes needed to keep the government’s finances on an even keel in the last year’s budget, which she claimed would be the biggest increase in revenue-raising measures in decades.
This time around, while she did not increase income tax or National Insurance Contributions for working people, she did extend a freeze on the income thresholds at which tax must be paid.
As inflation increases, more people will be pushed into higher tax brackets. By the 2029-2030 fiscal year, the move will encourage 780, 000 more people to pay basic income tax for the first time, along with 920, 000 more higher-rate taxpayers and 4, 000 additional-rate payers.
“This ‘ fiscal drag ‘ means that hundreds of thousands will start paying income tax for the first time, and all existing taxpayers will face higher liabilities”, Irem Guceri, associate professor of economics and public policy at Oxford University’s Blavatnik School of Government, said.
These thresholds had already been frozen until 2028 by the previous Conservative government. Reeves, who was initially extremely critical of that decision and claimed it hurt employees, has now made plans to extend that until 2031.
“I know that maintaining these thresholds is a decision that will affect working people”, she said. “I said that last year, and I won’t pretend otherwise now.”
The chancellor added, “I can confirm that I won’t be raising national insurance, the basic, higher, or additional rates of income tax or VAT],” adding.
Reeves said she will also target wealthier people via a “mansion tax” on those who own property worth more than 2 million pounds ($2.65m) and is reducing the amount of tax relief some higher earners can obtain on pension contributions. Additionally, she made an additional 2 percentage point increase in the tax rate for capital gains, dividends, and rental income.
DeVere’s CEO, Nigel Green, predicted that these actions will have broader “behavioural effects.” “People make long-term decisions about where to work, where to build wealth and where to retire”, he said.
“When pensions regulations are tightened severely, it undermines confidence in the system as a whole. He continued, “Wealth moves where governments maintain stability over decades rather than with impulsive extractions.”
Following the announcement, Kemi Badenoch, leader of the opposition Conservative party, described Reeves decision to raise taxes, despite promising not to do so again, as “a total humiliation”.
2. Labor will spend money on welfare
One of the highly anticipated announcements of the budget was the scrapping of the two-child benefit cap from April 2026. Parents can only currently claim special tax credits worth 3,455 pounds (4,571) per child for their first two children. The previous Conservative government imposed the cap. Reeves said this would lift thousands of children out of poverty.
According to Guceri, “the elimination of the two-child benefit cap” is likely to provide significant support to families currently living in poverty.
According to experts, the move will be particularly popular with Labour Party supporters. “The two-child benefit cap is widely despised among rebellious Labour MPs as a major contributor to child poverty”, said Colm Murphy, senior lecturer in British politics at Queen Mary University, London. Reeves needed to have a chance of remaining politically successful, Reeves said.
The move, according to Gregory Thwaites, research director at Resolution Foundation (RF), a British think tank that focuses on raising living standards.
“That’s something that we’ve been campaigning for RF for some time, and we’re very pleased to see that. Additionally, the tax system has some beneficial changes. So, for instance, giving those who own very expensive properties a little more money would be very welcome, Thwaites said.
“Ultimately, budgetary responsibility should not just be seen in terms of fiscal balance but also measures of broader wellbeing”, said professor Jasper Kenter, professorial research fellow at Aberystwyth Business School. In this regard, lifting the two-child benefit cap is crucial.
Reeves’ decision to tax wealth and increase welfare spending was welcomed by GMB workers’ union General Secretary Gary Smith, who described this budget as the “final nail in the coffin for the Conservatives’ failed austerity project.”
“Key public services, essential national infrastructure, and communities across the UK suffered deep wounds because the Tories made the wrong economic choices – we must never go back to those dark days”, a statement from Smith read.
The statement continued, “The challenge for Labour is to get to grips with rebuilding our economy and country, lock in significant investment to create growth, and start bringing a little hope to people.”
3. UK’s hated ‘ rape clause ‘ will be scrapped
Reeves said she would repeal the so-called “rape clause,” which exempts women from the two-child benefit cap policy if they can demonstrate that their child was born without consent.
She called the exemption rule “vile, grotesque, dehumanizing, and cruel.”
“I’m proud to be Britain’s first female chancellor”, Reeves told parliament. I am aware of the responsibilities that come with that. I will not tolerate the grotesque indignity of the rape clause for any longer.
4. Economic growth forecasts that are less than expected
The OBR’s forecast for this year’s economic growth increased from 1% to 1.5 percent in response to the budget.
However, it downgraded economic growth for the following four years. The OBR’s forecast for each of 2027, 2028, and 2029 has been downgraded from roughly 1.8 percent to 1.5 percent, while GDP growth for 2026 is currently projected to be 1.4 percent (down from 1.9%).
The downgrade is largely due to less optimistic expectations for productivity growth. Reeves insisted the sluggish outlook was the legacy of the previous Conservative government, however.
Reeves also announced a freeze on fuel taxes and rail fares, as well as support for energy bills, which Guceri said caused the OBR to lower inflation by 0.4 percentage points for the year ahead. The OBR increased its forecast for this year, she continued, “in response to stronger real wage growth and persistent food price pressures.”
5. The pound and the financial markets both had positive reactions.
Prior to the budget announcement, the price of the euro increased by 0.3 percent to reach $ 1.3213, before returning to roughly where it was at the beginning.
London’s blue-chip FTSE index and the FTSE 250 index rose by about 0.6 percent each in the wake of the budget.
