By David Milliken and Sachin Ravikumar

LONDON (Reuters) – Britain’s new finance minister, Rachel Reeves, announced the biggest tax rises in three decades in her first budget on Wednesday, accusing the former Conservative government of destroying the country’s public services.

Businesses and the wealthy were expected to bear the brunt of the tax rises and Reeves also paved the way for higher borrowing for investment to speed up the British economy, which was slowed by the 2007 global financial crisis- 2009, Brexit, COVID and the energy surge. price.

The former Bank of England economist – who said she was proud to be the first female Chancellor of the Exchequer – stressed there would be no repeat of the way the former Prime Minister Conservative Liz Truss sent the bond market crashing in 2022 with her unfunded tax cut. plans.

Early reactions to his speech suggested investors were unfazed by Labour’s early economic programme.

But government prices fell later as the scale of planned spending became clear and investors reduced their bets on a Bank of England interest rate cut next year.

Reeves said she would raise taxes by 40 billion pounds ($52 billion) a year, accusing the Conservatives of leaving her Labor Party with a budgetary “black hole”.

“Any responsible chancellor would take action,” she said. “This is why today I am restoring stability to our public finances and rebuilding our public services.”

She painted a bleak picture of Britain, with record waiting times in health services, children studying in crumbling schools and dysfunctional transport and justice systems.

But in a setback for the new government, a budget watchdog said the economy was expected to grow less than expected between 2026 and 2028, after only slightly outperforming in 2024 and 2025.

Showing the scale of the new tax increases which come on top of those of the previous government, the watchdog also said Reeves’ plans would take the government’s tax revenue to a historic high of 38.2% of the economic output by the end of the decade. This figure remains lower than many other European economies, but it is up from the current 36.4% and more than 5 points higher than before the pandemic.

According to the think tank Institute for Fiscal Studies, a £40bn tax rise would be equivalent to 1.25% of economic output, exceeded in recent history only in 1993 by a budget plan under the Conservatives.

Prime Minister Keir Starmer warned that “those with the broadest shoulders” would have to pay more to spare “the workers”.

The yield on 10-year British government bonds – which moves in the opposite direction to prices – rose by around four basis points that day at 1600 GMT, after falling sharply during Reeves’ speech earlier.

Investors expected fewer interest rate cuts from the BoE given the scale of government spending, with four quarter-point cuts expected in 2025, compared with around five earlier in the day.

INCREASED TAXES FOR BUSINESSES AND THE RICH

Reeves announced a series of tax increases, saying “difficult decisions cannot be constantly delayed or deferred”, as she sought to enforce her new rule aimed at rebalancing daily spending by the end of the decade.

The rate of social security contributions paid by employers will rise by 1.2 percentage points to 15% from April, and the threshold at which businesses start paying them will be lowered, raising £25 billion additional per year within five years.

Business leaders have warned that higher taxes, combined with planned new protections for workers and a rise in the minimum wage, could undermine Labor’s growth ambitions.

“This is a difficult budget for businesses,” said Rain Newton-Smith, director general of the CBI.

A cap on corporate profits tax is welcome, but the overall increase in costs for employers “would affect the ability to invest and ultimately make it more expensive to hire staff or increase costs.” salaries,” Newton-Smith said.

Other revenue-raising measures include changes to capital gains and inheritance taxes, as well as taxes paid by private equity firm executives, non-domiciled residents and jet users. private and private schools.

But Reeves unexpectedly ruled out more people paying basic and higher tax rates after the payment threshold freeze expires in the 2028/29 tax year.

She also extended the freeze on fuel duty and reduced the tax on draft beer in pubs, measures which could help reverse falling support for Starmer’s new government in opinion polls.

In another significant move, Reeves said she would change a second fiscal rule to allow more borrowing, paving the way for £100 billion of investment over the next five years.

Reeves said the government would now aim for a reduction in public sector net financial liabilities as a share of the economy, rather than public sector net debt excluding BoE.

Latest forecasts show the government is on track to borrow almost £142 billion more over the next five years than previously estimated.

Combined with higher taxes, the outlook for investors remains challenging, said Neil Birrell, investment director at Premier Miton Investors.

“It’s likely that bond and stock markets will view the plan as less bad than it could have been. But because investment plans are long-term in nature, it doesn’t look like a budget for growth,” he said.

(Additional reporting by Andy Bruce, Suban Abdulla, Muvija M, Sachin Ravikumar, Andrew MacAskill, Alistair Smout, Elizabeth Piper, Catarina Demony, Michael Holden; graphic by Sumanta Sen; writing by William Schomberg; editing by Hugh Lawson)