What to Expect from Labour’s First Budget: Key Predictions

The upcoming Budget, to be delivered by Chancellor Rachel Reeves on 30 October, marks a pivotal moment for Labour’s economic strategy, as the party seeks to implement its vision for the UK amidst economic turbulence and a volatile global market. With the government facing a £22 billion fiscal shortfall, Reeves has been vocal about the “challenging choices” that lie ahead, hinting that the Budget will necessitate some form of tax increases or spending adjustments.

The Context:

Rachel Reeves’ statement will be the first Labour Budget since the party took office earlier this year, after over a decade of Conservative-led governments. Reeves has acknowledged the significant economic headwinds inherited by Labour, including what she described as “the worst set of circumstances since the Second World War” in terms of public finances. The Chancellor’s rhetoric at the Labour Party Conference reflected cautious optimism but also hinted at a forthcoming period of fiscal consolidation.

Her predecessor, Jeremy Hunt, presented the last Budget in March 2024, just before the general election that saw Labour sweep into power. That Budget, focused on Conservative priorities, has now set the stage for Labour to reshape the country’s financial landscape. Expectations are high for the Chancellor to deliver a coherent plan that addresses both the immediate economic challenges and the longer-term structural issues facing the UK.

Key Areas of Focus: Tax Reforms in the Spotlight

Several tax changes are rumoured to be under consideration, despite Labour’s manifesto promise not to raise income tax, National Insurance, or VAT for “working people.” Instead, the party is reportedly exploring a range of measures that could affect wealthier individuals and businesses:

• Capital Gains Tax (CGT): There is widespread speculation that the Chancellor could either increase CGT rates or reduce the £3,000 annual allowance, potentially impacting business owners, shareholders, and landlords. Labour has previously signalled that capital gains could be an area for reform, arguing that it is a tax on wealth rather than work. According to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, “Labour hasn’t ruled out raising CGT. It would enable the government to deliver on the promise not to raise taxes for ‘working people’ because it’s a tax on wealth.”
• Inheritance Tax (IHT): Labour might also target IHT, which currently stands at 40% on estates valued above £325,000. With the number of estates subjected to the tax projected to rise sharply over the coming years, reducing reliefs or lowering the exemption threshold could generate significant revenue. Some within Labour have suggested that tightening inheritance tax rules could be a way to “address intergenerational inequality,” though such measures are likely to be contentious.
• Pensions Tax Relief: Labour has also hinted at changes to pensions tax relief, potentially moving to a flat rate system. This would likely reduce the attractiveness of pension contributions for higher earners. While there has been no confirmation of specific changes, pensions industry experts warn that any such move could have complex implications and potentially face legal challenges.

Policy Commitments and Spending Plans

Despite the looming budgetary constraints, Labour is keen to follow through on several high-profile spending commitments made during the election campaign. These include:

• Public Sector Pay Rises: Labour has already committed to increasing public sector salaries by an average of 5.5%, a measure expected to cost around £9 billion annually. This move is aimed at restoring public sector pay after years of wage stagnation.
• Winter Fuel Payments Reform: Labour has announced that it will restrict winter fuel payments to those on means-tested benefits, a change that could save £1.5 billion per year but has drawn criticism from pensioner groups.
• VAT on Private Schools: From January 2025, Labour plans to apply VAT to private school fees, a measure that could raise substantial revenue but may also lead to an exodus of students from private to state schools, potentially overwhelming the public education system.

Broader Economic Considerations

The Budget will be closely watched by both domestic and international investors for signals on Labour’s broader economic policy. The Office for Budget Responsibility (OBR) will release its independent forecast alongside the Budget, which will provide a critical assessment of the government’s plans.

The key question is whether Labour can stimulate growth while maintaining fiscal discipline. The UK economy has been through a tumultuous period, experiencing a brief recession at the end of 2023 before rebounding in early 2024. However, growth stalled again over the summer, leading to renewed concerns about the sustainability of the recovery.

Austerity 2.0 or Growth Agenda?

Given the pressures to reduce the fiscal deficit, Labour may find itself constrained in its ability to roll out ambitious new spending programmes. There is speculation that Reeves might opt for a more cautious approach, prioritising stability over expansion. However, Labour is also keen to avoid being labelled as the party of austerity, a tag that plagued previous Conservative governments.

One area where Labour has already signalled its intent is in tightening regulations on energy companies, with plans to increase the windfall tax on oil and gas firms from 35% to 38% starting 1 November. This move aims to address the growing cost of living crisis by channelling additional revenues into support for households facing rising energy bills.

What to Expect on 30 October

While many details remain under wraps, it is clear that this Budget will be about setting the foundations for Labour’s long-term economic strategy. Reeves has been clear that the government’s ultimate goal is to restore stability and drive sustainable growth. Yet, achieving this in a fiscally constrained environment will require deft political and economic manoeuvring.

As the Chancellor takes to the floor of the House of Commons at 12:30 PM on 30 October, the eyes of the nation—and the markets—will be watching closely to see whether Labour can balance its promises with the practicalities of governance. Whether this Budget is seen as the first step towards a more prosperous future or a prelude to austerity remains to be seen.