Britain’s chancellor aims to strike a balance with her 2025 budgethttps://en.majalla.com/node/328466/business-economy/britain%E2%80%99s-chancellor-aims-strike-balance-her-2025-budget
Britain’s chancellor aims to strike a balance with her 2025 budget
Policymakers’ main worry ahead of Rachel Reeves’ announcements this week centred on the reaction of the bond markets. So far, they have received a cautious welcome.
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Britain’s chancellor aims to strike a balance with her 2025 budget
British Chancellor Rachel Reeves delivered the government’s long awaited 2025 Budget this week, tweaking taxes to cover a black hole in the nation’s finances. It is roundly acknowledged that the Labour government’s economic inheritance was a poisoned chalice, with debt so high that 10% of spending goes just on its interest.
Labour won the second largest parliamentary majority in its history last year by promising the change that voters demanded, and it can point to a major cash injection for the National Health Service in its first 18 months in power, funded by higher employer National Insurance Contributions (NICs). Waiting lists are falling, emergency care practitioners are meeting more targets, and funding has been allocated to rebuild hospitals, with 250 new health hubs being rolled out nationwide, but there is more to do.
The macroeconomic picture looks better in areas. Inflation in the UK peaked at 11.1% in 2022 but had fallen to 3.6% last month, and the independent Office for Budget Responsibility (OBR) thinks it will reach 2.5% next year. If so, this will be a welcome relief for families struggling to put food on the table, heat their homes, and keep up with rent or mortgage payments.
Inflation in the UK peaked at 11.1% in 2022 but had fallen to 3.6% last month
Keeping to the rules
Reeves needed to adhere to strict fiscal rules to stop the bond markets from reacting, which would have sent the cost of Britain's debt to new highs. This is what happened after former Conservative Prime Minister Liz Truss delivered an ideological but unfunded tax-cutting 'mini budget'. Within days, she was kicked out of 10 Downing Street, her name later becoming a byword for reckless economic decisions.
Aiming to create a more equitable Britain, Reeves took aim at child poverty by reversing the previous government's two-child benefit cap, which will help more than 400,000 children. In energy, every household will benefit from a government subsidy, receiving a $200 discount on next year's bills. The National Minimum Wage will rise by 4.1%. Yet to invest in infrastructure and reduce the national debt, productivity needs to go up, but real GDP (gross domestic product) is forecast to grow by only 1.5% on average over the forecast, 0.3% less than the OBR projected in March.
With the loss of European Union structural funding for employment and business support, and the interim domestic scheme nearing its end, Reeves said $17.2bn would be channelled into similar programmes through regional mayors. The UK is still a very centralised democracy, so expanding mayoral powers is a significant development.
Tourists walk in the drizzle, on the South Bank of the River Thames, with the Houses of Parliament seen behind, in London on 31 January 2025.
Winners and losers
In London, the idea of a tourism levy has long been supported by many locals, given that it would help improve services for residents, and this budget empowers local leaders to introduce this, pending consultation on the details. A tourism levy could raise up to $320mn annually, in a city that gives free access to some of the world's leading museums and galleries.
Reeves used her Budget speech to extend the sugar tax (to include milkshakes and packaged lattes), increase taxes on remote and online gambling, and introduce the UK's first 'pay-per-mile' road charge for electric vehicles (EVs), on top of the country's existing vehicle taxes.
For businesses, the Budget brought mixed news. Small firms, which are vital to reviving local high streets struggling to compete with online shopping, will benefit from a sweeping review of business rates. The reforms aim to support local shops while shifting a larger share of the burden onto warehouse-based retailers.
Reeves said she wanted to bring government borrowing down, and this is expected to drop from $180bn to under $150bn next year, and to halve again to under $90bn by 2029–30, at which point she predicts a return to a budget surplus. Whether that will be enough for voters, only time will tell.
