Budget 2024: Chancellor Rachel Reeves defends £40bn tax rises – ‘everything has to be paid for’
Rachel Reeves has defended raising taxes by the highest amount since 1993 as she said “everything has to be paid for”.
The chancellor announced £40bn worth of tax rises in Wednesday’s budget, with the lion’s share coming from a £25bn increase in employers’ National Insurance contributions.
She told Sky News’ Breakfast With Kay Burley that, unlike the previous Conservative government, she has included everything ministers will spend in their forecast, including £11.8bn compensation for victims of the infected blood scandal and £1.8bn for victims of the Post Office accounting scandal.
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Ms Reeves insisted the tax rises would “fix the foundations and wipe the slate clean” and that this would be a one-off budget.
She added: “As a result of what we’ve done, we’re not going to have to come back and ever do a budget like this again, because we’ve brought everything out into the open.”
The chancellor also admitted growth “is largely unchanged” in the next five years, as revealed by the Office for Budget Responsibility’s (OBR) report on the budget.
But she said that is because she is looking at the economy in the long-term.
She said: “For the first time, the OBR are now looking at economic growth over a longer time frame.
“And that’s really important because often politicians make short-term decisions rather than things that are in the long term interests of the country.”
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‘Raising taxes was not an easy decision’
Ms Reeves said she had to make the tax rises she did, despite promising not to raise taxes beyond Labour’s manifesto, because of “the circumstances that I inherited” from the Conservatives as she repeated they left a £22bn black hole.
“I could have swept that under the carpet and pretended it didn’t exist, or try and raise a bit of money this year and a bit more next year,” she said.
“I didn’t want to do that.
“I wanted to be open and honest, to wipe the slate clean, to put our public finances on a stable trajectory, to make sure that our NHS is properly funded so we can bring down those huge waiting lists.”
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Ms Reeves’ predecessor, the Conservative Party’s Jeremy Hunt, said Wednesday was a “bad day for trust in British politics” and said it will mean “lower pay, lower living standards, higher inflation, higher mortgages” for ordinary families.
He told Sky News: “Because 30 times this year before the election, the chancellor said she had no plans to increase tax outside of what was explicitly written in the Labour manifesto.
“And we had the biggest tax raising budget in British history.”
The shadow chancellor said a Conservative budget would have taken “the harder path” by cutting the number of people on benefits to 2019 levels to fund public services, which he said would release £34bn a year.
He added he does not think “anyone actually believes this £22bn number… but she didn’t increase taxes by £22bn, she increased them by £40bn”.
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“This was not about her legacy. This was a choice,” he added.
“This was the budget that she wanted to do all along. And it’s a legitimate choice. It’s one I disagree with. But if she’d wanted to do that, she should have told us before the election we could have had the debate.”
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The pound has fallen sharply after the chancellor announced the biggest tax rises in a generation.
Over the last three days, sterling has dropped by 1.2% (in trade weighted terms) – the biggest fall in 18 months.
Between around 1.30pm and 5.30pm today, versus the dollar, it dropped from about 129.9c to the pound to about 128.6c. In the same period, against the euro, it went from 119.3c to the pound to about 118.4c.
In addition, yields for 10-year UK bonds – the cost or interest rate charged for long-term government borrowing – have gone past 4.5% for the first time in a year.
Ed Conway, Sky News’s economics and data editor, said those yields are “pretty much halfway towards the danger zone” – a zone identified by the Office for Budget Responsibility (OBR).
However, he said other European bonds had risen, too. “But the UK does seem to be moving faster than most of the others,” he added.
While cautioning that the budget is still very new, Conway said the “upshot” is that Rachel Reeves’s “room for manoeuvre” is already diminishing “because of market moves”.
Markets are reacting in “quite a violent way”, Conway said.
“It’s really unusual to see this after a budget, and that will have a bearing on how much this government will be able to afford in the future,” he added.
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‘Raising taxes was not an easy decision’
A sudden rise in the yields of 10-year UK bonds followed Liz Truss’s disastrous “mini-budget” of September 2022, which led to a surge in the cost of borrowing for ordinary consumers, while the pound slumped to a 37-year low against the dollar.
It is “certainly not like that at the moment”, Conway said.
Nonetheless, market movements will be “enough to really concern people at the Treasury”, he added, “because it suggests that a lot of traders are looking at how much money this government is borrowing, and they’re saying: ‘Hang on, maybe we’re going to charge you more’.”
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The pound has weakened and gilt yields – the cost of borrowing by the UK government – has increased in response to the budget, which saw Rachel Reeves introduce the biggest tax hike in a generation.
While Conway said it does not feel like a “crisis point”, he said the “calculus for this government” may be changing.
Jack Meaning, UK chief economist at Barclays, said market reaction was “materially different” to what happened in 2022.
Bond yields since Ms Reeves’s budget are up by about 0.3%, while in 2022 the rise was about 1.5%, he said.
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The conversation Barclays is having with its customers is also different to that in 2022, Mr Meaning added.
At that time, people were wondering whether a “big crisis point” had been reached.
This time, he said the focus is on comments from the OBR about a potential rise in inflation, and the potential knock-on effect as the Bank of England makes decisions on interest rates in the next few months.
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The prime minister’s official spokesperson refused to talk about bond prices.
“We don’t comment on market movements,” they said.
“The chancellor has been very clear that first and foremost, this budget has been about restoring fiscal stability, and she’s outlined two new robust fiscal rules, which put public finances on a sustainable path.”
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