UK Chancellor Rachel Reeves Unveils £26.1bn Tax Hikes Amidst OBR Forecast Leak & Economic Slowdown

UK Chancellor Rachel Reeves Unveils £26.1bn Tax Hikes Amidst OBR Forecast Leak

United Kingdom Chancellor of the Exchequer Rachel Reeves has presented a pivotal budget, unveiling substantial tax increases designed to generate an estimated £26.1 billion ($34.4 billion) for public coffers. This significant fiscal adjustment comes as the government grapples with a downgraded forecast for economic growth, posing a formidable challenge for the Labour Party's second budget since returning to power.

The budget presentation itself was overshadowed by an unprecedented leak from the Office for Budget Responsibility (OBR), the government's independent forecaster. The OBR prematurely published its economic and financial outlook online, inadvertently revealing the budget's core measures ahead of Reeves's official statement to parliament. Reeves strongly criticized the watchdog for this "deeply disappointing and a serious error," which the OBR attributed to a "technical error."

Tasked with the demanding dual mandate of restoring the UK’s public finances while honoring Labour’s election promises, Reeves emphasized stability over reckless borrowing or dangerous cuts. Her choices, she stated, aim to provide "stability for our economy, security for the public finances and security for family finances too."

Significant Tax Adjustments Unveiled

The most impactful revenue-generating measure centers on a freeze of income tax thresholds. This means that as wages naturally increase, more individuals will be drawn into higher tax brackets. By the 2029-2030 fiscal year, this freeze on income tax and national insurance thresholds is projected to bring 780,000 new basic-rate taxpayers, 920,000 additional higher-rate taxpayers, and 4,000 new additional-rate payers into the system. This single policy is expected to raise approximately £8.3 billion ($10.95 billion) by 2029-2030 and will extend until 2030-2031.

Further personal tax changes include generating £4.7 billion ($6.2 billion) by levying national insurance on salary-sacrificed pension contributions, and an additional £2.1 billion ($2.77 billion) through a 2 percentage point increase in tax rates on dividends, property, and savings income. Cumulatively, the OBR now anticipates the tax burden reaching 38.3 percent of Gross Domestic Product (GDP) by 2030-2031, marking an all-time high.

New Revenue Streams and Duties

Beyond personal taxation, Reeves announced several other revenue-raising initiatives:

• Mansion Tax: A new "mansion tax" on homes valued over £2 million ($2.6 million) will come into effect in 2028, forecast to raise £400 million ($527.6 million).
• EV Charge: From April 2028, electric and plug-in hybrid vehicles will face a new charge of 3 pence (4 cents) per mile, expected to generate £1.4 billion ($1.85 billion).
• Gambling Duty: Duties on remote gambling will increase from 21 percent to 40 percent, projected to raise over £1 billion ($1.3 billion) by 2031.

Economic Headwinds and Political Fallout

These fiscal tightening measures are implemented against a backdrop of weakening economic growth. While the OBR revised its GDP growth forecast for 2025 slightly upwards to 1.5 percent from 1 percent, it significantly downgraded medium-term projections. Growth for 2026 is now expected at 1.4 percent (down from 1.9 percent), and 2027 at 1.5 percent (down from 1.8 percent), with similar reductions extending through 2029, largely due to lower productivity growth expectations. Reeves attributed this sluggish outlook to the legacy of the previous Conservative governments, emphasizing Labour’s commitment to stability since taking office.

The OBR leak, however, dominated the political narrative. Opposition leader Kemi Badenoch branded the incident as making Britain a "shambolic laughing stock" and called for Reeves's resignation. Shadow chancellor Mel Stride condemned the premature release as an "utterly outrageous" disclosure of market-sensitive information, potentially even a criminal act. The budget's unveiling comes at a politically delicate juncture for Prime Minister Keir Starmer’s government, already contending with low poll ratings and internal party dissent. Despite the challenges, Reeves asserted that Labour's plan would "beat the forecasts" and lay the groundwork for sustained long-term growth, stating, "Brick by brick we’ve been building growth in our economy."