Rachel Reeves’ Budget Will Be A Disaster

Rachel Reeves set out tax-raising measures worth £26bn in her Budget speech yesterday. This comes only a year after the previous Budget raised taxes by £40bn. Taken together, these represent one of the largest cumulative tax increases in modern British history.

A large portion of these new revenues comes from the government’s decision to freeze income tax thresholds until at least 2030–31. Reeves’ package therefore relies heavily on fiscal drag, the mechanism through which more of a worker’s income is pulled into higher tax brackets when wages rise with inflation. Framed as a freeze, it is in fact one of the most powerful forms of stealth taxation. The OBR forecasts that the policy will push 3.2 million additional people into higher-rate tax bands and raise £8bn a year once fully realised.

Reeves pairs this with a significant change to pension rules. Pension contributions made through salary sacrifice above £2,000 a year will no longer be exempt from National Insurance from April 2029. Attempting to protect more than £2,000 of income through salary sacrifice will therefore incur extra taxation. At the individual level, this undermines one of the few remaining incentives for long-term, responsible saving. This effectively raises the tax burden on middle-income earners who save consistently. At the national level, it will mean smaller pension pots, greater reliance on state support, and a population that is less financially autonomous in retirement. The OBR estimates that this measure will raise £4.7bn annually by the end of the decade.

Alongside these tax-raising measures, Reeves confirmed the removal of the two-child benefit cap. The change is estimated to cost £3bn a year by 2029–30. Introduced in 2017, the cap limited parents to claiming benefits for their first two children on the principle that those relying on public support should face the same financial trade-offs as working households. Scrapping the cap will significantly increase welfare spending, a cost that will now be offset through higher taxes elsewhere.

Reeves also introduced a suite of small but cumulative tax rises on income derived from assets rather than work. Dividend taxes will rise, savings interest will be taxed more heavily, property income rates will increase, and trusts will face a tighter regime. Individually each change is modest; however, together they represent a decisive shift toward taxing accumulated wealth and investment returns more aggressively. The Treasury expects more than £2bn a year from these adjustments. For many households, this will erode returns on savings, investments, and rental properties.

A further asset-focused measure comes in the form of a new high-value property surcharge, informally described as a mansion tax. It takes effect in April 2028 and applies to homes valued at more than £2 million. It will affect fewer than 1% of properties and raise roughly £400m a year. The annual charge increases with property value and will be added directly to council tax bills. Symbolically it marks a growing willingness to treat high-value housing as a stable and taxable resource rather than a private asset purchased with post-tax income.

Gambling duties will also increase. Reeves presented this as a behavioural nudge aimed at curbing unhealthy habits, although the numbers reveal a much clearer motive. The policy is expected to generate more than £1.1bn in additional revenue each year. The rise falls overwhelmingly on online gambling rather than in-person betting, which means the burden will be placed on users of gaming apps, online bookmakers, and casino sites. This is politically easy to justify because gambling is widely recognised as a vice. However, the asymmetry of the policy weakens the moral framing. If the motive were moral rather than financial, the measure would target gambling as a whole and not only one segment of the industry.

The government will also introduce a pay-per-mile charge for electric vehicles. From 2028–29, battery-electric cars will pay £0.03 per mile, and plug-in hybrids will pay £0.015 per mile. For the average electric-vehicle driver covering 8,500 miles a year, this amounts to a typical bill of £255. The Treasury claims that this is necessary because fuel duty receipts, once worth more than £28bn a year, have collapsed as electric vehicles replace petrol and diesel cars. The new charge is projected to recover a portion of those lost revenues and represents the end of the era of subsidised green transport.

Reeves openly acknowledged the bleak backdrop to these decisions. The United Kingdom’s net financial debt now stands at £2.6 trillion, around 83% of GDP, and one in every ten pounds spent by the government goes directly toward interest payments. That money is not invested in infrastructure, public services, or productivity; it is simply the cost of staying solvent.

This creates a dangerous dynamic. High debt leads to high interest payments. High interest payments force higher taxes. Higher taxes depress private investment. Lower private investment reduces productivity. Lower productivity slows growth. Slower growth reduces tax revenues. Reduced revenues then increase borrowing. Economists call this a debt trap, and despite acknowledging some of the symptoms, Reeves’ Budget does nothing to address their cause. In fact, her Budget accelerates the same Keynesian reflexes that helped create the problem: more spending, more borrowing, and more taxation.

Despite all these issues, Reeves still presented the forecast of 1.5% GDP growth as a major success. In reality, this figure should not be viewed as encouraging. Large economies can appear to grow even when they are barely moving. If a millionaire earns £15,000 in one year, their wealth has increased by 1.5%, yet no one would describe this as a significant financial success. The same logic applies at the national level; the laws of economics do not change when scaled up. A £2.6 trillion economy growing at 1.5% is no cause for celebration. It is close to stagnation. We have come to expect such unremarkable economic progress following the post-war consensus, but we should not.

This missing growth may well be explained by the fact that government spending has reached 45% of GDP as of 2022. At this point the state is not managing the economy; it is the economy. In the 1920s, when Britain governed a global empire covering a quarter of the world’s landmass and population, government spending rarely exceeded 25% of GDP. Administration then relied on telegrams, paper, and post. Today, with digital communication, integrated data systems, and automation, governing should require fewer resources, not more.

Yet the modern British state consumes an ever-growing share of national wealth, absorbing the gains of technological progress to expand its own scale rather than reduce its footprint. Without the compensating effect of private-sector innovation, the smothering weight of the state would be unmistakable. Few areas of the economy have expanded as rapidly as the state itself. The state does little to benefit the economy; it effectively takes resources from one area and allocates them to another. Until this fundamental problem is addressed, the country will not flourish and may slowly trudge ever closer to disaster.

Reeves’ Budget therefore poses a significant risk to Britain’s long-term economic stability. By raising taxes sharply while offering none of the radical reforms needed to avoid disaster, the government risks locking the country into a permanent condition of low growth and high dependency.