UK Finance Minister Rachel Reeves speaks at the Labor Party conference at the ACC Liverpool Conference Center on September 23, 2024 in Liverpool, UK.
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LONDON – British Finance Minister Rachel Reeves will unveil the government’s much-anticipated first budget on Wednesday, ending weeks of uncertainty over potential tax increases and spending cuts.
The fiscal announcement, Labour’s first in almost 15 years, sparked much speculation, with Prime Minister Keir Starmer warning that “pain” His government is trying to reconcile the “black hole” in public finances with its wider problems. promote growth agenda.
Reeves clarified the statement on Thursday, confirm She will use the budget to announce a widely expected change to UK debt rules to free up billions of pounds for investment. However, she did not specify what investment rules would change.
“We will measure the debt in a different way. But, of course, we will put guardrails in place,” Reeves told Sky News on Thursday after the announcement was first made on Sky News. Financial Times.
Report It is suggested that the Treasury could target public sector net financial liabilities (PSNFL) rather than public sector net debt when measuring UK debt. The PSNFL indicator takes a broader look at the government’s balance sheet than public sector net debt, including financial assets and liabilities. The Treasury Department declined to comment on the proposals.
Goldman Sachs estimated in a report on Friday that the changes could increase the government’s fiscal space by about 50 billion pounds ($65 billion). Still, Goldman noted that the Treasury is unlikely to use all of the increase and that any increase would be phased in “over several years.”
“We believe the chancellor is unlikely to use all the resulting fiscal space and will instead leave greater room for debt rules,” Goldman Sachs said in a note.
As a result, Reeves is still expected to rely heavily on a series of tax reforms to fill what she calls ” £100bn spending gap ($129.6 billion) over the next five years. Here are the possible changes.
What changes are expected
Labor has repeatedly ruled out increases in income tax, National Security Social Security, VAT (sales tax) and corporation tax, insisting it will not break the promises outlined in its election manifesto.
However, recent government rhetoric has shifted toward avoiding tax increases for “working people,” suggesting that reforms targeting high earners and employers may be on the agenda.
Starmer told Sky News last week that people Own shares It does not fall under his “definition” of working people. The Treasury Department later clarified that workers could own small amounts of stock.
The government has also not ruled out potential changes to National Insurance tax on employers’ pension contributions, which would result in business owners paying more to employ workers.
Reports suggest Reeves may extend his term Freeze personal income tax thresholds set by the previous Conservative government. While the policy does not raise overall income tax rates, it is often referred to as a “stealth tax” because it ultimately drags workers into paying more taxes as a pay increase moves them into a higher tax bracket.
Elsewhere, reforms to inheritance tax (IHT) and capital gains tax (CGT) remain under discussion as the government seeks to reduce wealth imbalances across the country. Even plans to impose new taxes on “non-residents” in the UK may be affected. Downplayed Concerns that it would not increase revenue instead triggered wealth outflow.
Analysts expressed mixed views on the expected measures, noting that Reeves has a delicate line to walk in balancing the books. Goldman Sachs estimated in a report on Friday that the government may need to raise 25 billion pounds a year to meet spending targets.
“Our main message is that Chancellor Reeves will try to deal with a range of strains on public finances to meet her twin objectives of avoiding real substantive cuts in non-protected spending and increasing public investment. Tax increases will be needed to help To achieve these goals, Investec said in a report on Thursday.
Duncan Edwards, chief executive of Anglo-American Business Corporation, warned the government against excessive measures that could harm business.
“Raising taxes, raising the cost of doing business here, penalizing investment by raising capital gains taxes and so on, these all seem like strange ways to achieve a growth agenda,” Edwards told CNBC’s “Squawk Box Europe” on Friday. “
UK markets uneasy
Reeves has been criticized for not publishing a budget ahead of Labor’s July 4 election, with critics saying the delay cast a cloud of uncertainty over the economy and business.
Latest data from GfK on Friday showed consumer confidence fell to its lowest level since March in October, when former chancellor Jeremy Hunt delivered his final budget. S&P Global Express showed on Thursday that business confidence also fell to an 11-month low this month.
Meanwhile, government borrowing costs rise sharply as memories of former Prime Minister Liz Truss’ disastrous September 2022 “Mini Budget” Stay tuned. UK bond yields climbed after Reeves announced debt rules on Thursday, with the 10-year gilt yield hovering near a 16-week high of 4.24%. Still, analysts ruled out the possibility of a similar market crash.
“Is this going to be a Liz Truss moment? We don’t think so,” Andrzej Szczepaniak, Nomura’s vice president of European economics, told CNBC’s “Street Signs” on Friday.
“In fact, now the government can open up investment,” he continued. “This is actually quite good for the UK economy. The UK has a long history of structural underinvestment compared to other countries in the G7.”
The International Monetary Fund, which recommends increased infrastructure investment, upgraded Britain’s growth outlook on Thursday and now expects the UK economy to expand by 1.1% in 2024, up from its previous forecast of 0.7%.
“This level of recognition of the changes will help,” Susannah Streeter, head of currencies and markets at Hargreaves Lansdown, wrote in a note on Friday. Contain the bond market reaction and avoid a massive sell-off.
—CNBC’s Sam Meredith contributed to this report.
