What to expect from the October budget
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From big borrowing to taxes increases, here is what to expect from the new Labour government’s first budget.
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In brief…
- Labour is set to lay its economic plan for the coming year in the Autumn budget on 30 October.
- They have ruled out an increase on income tax, national insurance and VAT, but we can expect taxes to rise in other areas as Labour scrambles to plug a £22 billion fiscal black hole.
- The News Agents say this is the first real defining moment of this new Labour government.
What’s the story?
Rachel Reeves is set to unveil the first budget of the new Labour government on Wednesday 30 October.
It is “clearly a moment of definition, and it is a moment when trade-offs are going to have to happen", says Lewis Goodall.
With Labour ruling out “taxes on working people”, all eyes are on the chancellor to see how exactly she will plug the £22 billion fiscal black hole she claims was left behind by the Tories.
The party has warned it will have to make “difficult decisions” spending in the budget due to the state of the country’s finances, although Reeves has assured there will be “no return to austerity” under Labour.
It also likely means we can expect taxes to rise in some form.
Reeves confirmed this in an interview with The News Agents in July 2024.
The question is, where will these tax increases come from, if not from taxes on “working people”? While the exact shape it will take remains somewhat vague, here is what measures we know could be included in the budget so far, and what definitely won’t.
Chancellor Rachel Reeves tells The News Agents: "I think we will have to increase taxes"
What measures could be included?
Speculation has been rife over whether Labour will increase national insurance contributions for employers, not employees, in the budget.
Working people currently pay 8% of their income in national insurance on everything they earn over £12,500, while employers pay 13.8%.
It’s estimated that by increasing employers' national insurance contributions by 2%, an extra £17 billion could pour into the Treasury’s coffers.
That would leave them just £5bn short of filling the fiscal black hole.
One thing we do know, is that the government will be easing its own debt rules so it can borrow more, in order to invest.
Rachel Reeves has already said making a technical change to the government's debt measurement will allow up to £50 billion in increased borrowing.
She says the resulting investments would make the UK more enticing for overseas investors, but shadow chancellor Jeremy Hunt has said more borrowing would mean higher interest rates.
Lewis says this will enable the Chancellor to “reclassify what investment is, in terms of whether that counts as debt or not.”
But Emily Maitlis says the challenge for Reeves is that she will have to avoid borrowing so much that it scares off investors.
She adds: “She [Reeves] doesn't want to be the Labour Chancellor that has scared off the people who are going to help this economy grow. All she's left with is big borrowing.”
Labour has not ruled out increasing capital gains tax, a tax on the profit when you sell an asset that has gained in value. Currently, the levy for high earners is 24% on gains from selling additional property, or 20% on profits from assets such as shares.
Keir Starmer has said speculations that he could raise the tax by up to 39% were wide off the mark, but it is broadly believed these will go up at least to some degree.
Labour pledged to introduce a tax on non-domicile status, or “non-doms” in its general election manifesto, but it is understood Reeves will lay out clearly in the budget how this new tax will work.
A non-dom is a UK resident who doesn't pay taxes on money earned abroad. Reeves has previously said closing this tax loophole could raise up to £2.6 billion for The Treasury.
Inheritance tax increases have also not been ruled out, nor has a change to the previous Tory Government’s freeze on fuel duty.
It’s also very likely “we'll see changes in the way the state deals with pensions and taxes pensions”, Lewis says.
What have Labour ruled out?
Starmer has said he believes those with the "broadest shoulders" should bear the "heaviest burden”.
But Labour has explicitly stated that it will not raise income tax, value added tax (VAT) or national insurance for employees, to spare “working people”.
Jon notes: “Once you've ruled out income tax and all the rest of it, it's pretty difficult to find ways of taxing people that are going to be effective.”
Lewis points out that “treasury ministers and officials are sort of scrambling around trying to find even quite small changes that might raise some money”.
What’s The News Agents take?
“It's the first big opportunity for Rachel Reeves, beyond the winter fuel payment, to actually say, what is this government about?”, says Lewis.
He adds: “Initially, we thought it sounded like it was going to be a very hair shirt budget, because Keir Starmer said that things were going to get worse before they get better.“
"Parts of this budget, it seems to me, are going to feel very much like something that we would have expected from George Osborne in terms of the settlement of some areas of public spending.”
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