When the Chancellor stands up to deliver the 2025 Budget, the central question will not be whether she can balance the books but whether she can reboot growth without choking off a fragile recovery. With the economy growing by only 0.1%, any missteps on tax risks tipping the 海角视频 from weak expansion into contraction.
Rachel Reeves has staked her credibility on restoring fiscal discipline and markets will want reassuring that public finances are under control while voters and businesses want to feel that better times are possible. As a result, the dilemma at the heart of this Budget is how to be tough enough to satisfy the bond markets but not so tough that households and firms lose confidence.
The challenge is made harder by decisions already taken and by a labour market that is weakening with unemployment having risen to 5%, the highest level in four years.
In that environment, last year’s decision to raise employers’ national insurance contributions looks even more questionable and, as the Bank of England governor Andrew Bailey observed, higher payroll taxes have led many businesses to cut hiring, reduce working hours and restrain pay. Firms are also dealing with a sharp rise in the national living wage for over-21s and new workers’ rights that add further cost and complexity.
These policies are intended to improve living standards and security for those in work but there is a real danger of unintended consequences and faced with higher fixed costs and ongoing uncertainty, many businesses will delay recruitment, scale back investment or automate roles rather than taking a chance on new staff.
In that context, the reports that the Chancellor has abandoned plans to raise income tax rates are welcome as she had been on course to become the first chancellor in half a century to increase the basic rate, breaking a manifesto pledge in the process before a late U-turn allegedly driven by political and market concerns.
But while the headline rate is now allegedly safe, that does not mean people’s overall tax burden is and the likely extension of the freeze on income tax thresholds means millions of those working will be dragged into higher bands as wages rise, paying more tax without any formal increase in rates. Indeed, it has been suggested that if the freeze is pushed out to 2030, one in four employees could be dragged into the 40% band, raising around £8bn a year without a single rate rise.
For households only just emerging from the worst of the cost-of-living squeeze, that matters as real incomes remain under pressure from higher housing, energy and food costs. Even without a hike in the basic rate, continued fiscal drag will drain spending power from consumers and sap confidence on the high street. For a nation that relies heavily on consumption, this is a dangerous moment as if you squeeze too hard, you risk choking off the very demand that keeps the economy afloat.
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Yet simply promising not to raise headline tax rates is not enough as public services are under severe strain and there are legitimate demands for more investment in skills, infrastructure and the green transition. If Reeves is to persuade the country that she can be both responsible and fair, she will need to show that every pound raised and spent is part of a coherent growth strategy, not just short-term firefighting.
That leads to the uncomfortable question politicians rarely confront directly namely that if some taxes cannot rise, which ones might have to? Rather than openly increasing the main rates of income tax, National Insurance or VAT, the Treasury is more likely to chip away at reliefs that are less visible to the average voter. That includes tightening pension tax advantages for higher earners, restricting business property relief or other inheritance tax planning tools, and revisiting reliefs that are deemed “poor value” such as some elements of capital gains tax treatment on second homes and buy-to-let.
Wealth and assets will be in the crosshairs and with ministers repeatedly insisting that “working people” will not face higher taxes, the political logic points towards those with accumulated capital rather than earned income. That could mean aligning capital gains tax rates more closely with income tax, increasing charges on dividends, or introducing new bands or surcharges on very high-value property transactions. None of these moves are painless as they risk dampening investment and mobility if done badly but if the government is determined to placate its backbenchers by raising more from those it regards as “better off”, this is where it will look.
Finally, we should expect more to be raised through environmental and consumption taxes. Carbon pricing, air passenger duty, fuel duty after years of freezes, and levies on high-emission activities are all obvious candidates, particularly if they can be sold as part of a fair transition to net zero. Similarly, “sin taxes” on tobacco, vaping and some types of gambling are politically easier to justify than broad-based hikes even if their revenue potential is limited.
Of course, the danger is that a series of piecemeal measures in all these areas adds complexity without delivering a clear pro-growth signal. To date, there seem to be little indication of this with the most likely measures being the re-badging of existing capital allowances, modest help on business rates, and promises of £6bn of red-tape cuts. Hopefully, there will be more because if investors, entrepreneurs and skilled workers conclude that Britain is becoming a high-tax economy, they will quietly deploy their capital and their careers elsewhere.
Ultimately, her success as chancellor will be judged not on Wednesday’s announcements but more on whether, five years from now, the 海角视频 is a more dynamic and prosperous economy than it is today. That will only happen if the 2025 Budget marks a clear shift from taxing work and risk towards incentivising investment and enterprise and, more importantly, ensuring that any unavoidable tax rises are delivered in ways that support, rather than strangle, long-term growth.