Fiscal Maneuver in Great Britain: Between Tax Increases and Growth Issues

The recently unveiled fiscal measures by Rachel Reeves, the British Finance Minister, have sparked both astonished and skeptical reactions. With a tax increase of over 40 billion pounds and increased borrowing, Reeves has set historical benchmarks. This fiscal easing, which amounts to nearly 1% of the UK’s GDP, reaches dimensions seldom seen outside of recessions and pandemics. The assessment by the UK's Office for Budget Responsibility suggests that this stimulus package could raise inflation by up to 0.4 percentage points, leading to substantial sales of British government bonds. This significant fiscal step contrasts with Reeves’ previously conservative approach before the elections, where the promise was to boost economic growth without major tax hikes. Nevertheless, she now more heavily relies on proven methods to provide urgently needed funds for the National Health Service. The balancing act of avoiding necessary tax system reforms remains questionable. Particularly contentious was the increase in employer contributions to social security, which, despite contrary promises, is ultimately likely to be passed on to employees. As the debate over broken election promises gains momentum, a simpler solution might have been to reverse previous cuts to social security contributions. Although the tax plans targeted the stronger shoulders of the wealthy, overall, they were less radical than expected. Noteworthy are the moderate increases in capital gains tax and adjustments to inheritance tax privileges for certain stock indexes. Amid a freshly won election victory, Reeves had the opportunity for profound tax reforms, yet missed chances, for example regarding stamp duty - a significant growth impediment. The lack of adjustments to gambling taxes and vehicle taxes on electric cars is also viewed critically. What remains are necessary tax hikes to support the health system with a real increase of 3.4%, even if this seems unsustainable in the long run. Regarding debt, the UK will likely have to cope with annual increases of 30 billion pounds; a development already raising questions about the appropriate use of these funds. The government under Reeves is making massive bets on additional spending, higher taxes, and market-based expansion - yet without the suitable structural reforms, such promises remain speculative. The coming months will reveal whether this fiscal tightrope act will succeed.