Reeves' Budget: Spirit of Optimism Meets Fiscal Reality in the United Kingdom

Prime Minister Sir Keir Starmer had warned of drastic decisions, and British Finance Minister Rachel Reeves delivered. With the most ambitious tax increase package since the early 1990s, she is initiating a turnaround that holds employers accountable with a £25 billion increase in national insurance contributions and stricter taxation of capital gains and non-doms. The aim is to finance an annual increase in public spending of £70 billion. However, the forecast from the Office for Budget Responsibility (OBR) shows that Reeves' measures are expected to drive strong growth initially, but will have little impact on economic performance in the long term. According to these proposals, the state will play a more dominant role in the economy, at the expense of consumers and businesses. Even if the new budget rules can be adhered to, a relaxation in fiscal policy is evident compared to the previous version from March. Although some borrowing had been anticipated, the OBR's assessment is that the budget constitutes one of the largest fiscal easements of recent decades. The combination of new taxes and borrowing allows Reeves to increase state spending by about £70 billion annually over the next five years, raising the state's share of GDP to 44 percent. Paul Johnson from the Institute for Fiscal Studies criticizes: The spending is heavily front-loaded without long-term growth forecasts exceeding 1.3 percent. The government might be forced to raise taxes again, as spending outside certain protected areas such as health and defense will still decrease. Although there is optimism about an economic upturn, the OBR indicates this will not be noticeable until the 2032-33 budget. In the short term, the measures could both drive inflation and crowd out private investment, which is likely to also affect the Bank of England. Despite Reeves' plans to put more money into citizens' pockets, it is expected that the tax increases on employers will ultimately impact employees, whose wages are likely to rise more slowly. Projections suggest that disposable household income will be about one percent below the expectations from March. Michael Saunders of Oxford Economics considers the budget consolidation credible. The budget surplus will decline more slowly, but a new rule to balance consumptive spending with additional tax revenues can be narrowly adhered to. Despite softer debt targets, the fiscal situation remains tense, and further tax increases in the coming years are not ruled out if growth fails to materialize.