Latihan shadowing: The 2025 Budget Explained
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- On Wednesday, Chancellor Rachel Reeves finally revealed her much -anticipated budget.0:00
- After a lot of rather public towing and throwing, in the end, Reeves decided against raising one of the big taxes and instead opted to fiddle with a smorgasbord of0:04
- minor taxes in an attempt to balance the UK's books.0:14
- So in this video, we're going to take a look at what actually happened in the budget and why, while it might be politically understandable, it's economically suboptimal.0:18
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- So before we get into the tax rises themselves, we should first explain why Reeves needed to raise taxes in the first place.0:54
- This all has to do with the so -called fiscal rules that Starmor and Reeves announced when they first took office last year.1:01
- For context, fiscal rules are self -imposed rules that limit how much a government can spend or borrow, and Reeves and Starmor set themselves some pretty stringent ones in order1:07
- to signal to both markets and skeptical voters that they could be trusted with the economy.1:17
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- Technically, they set themselves three fiscal rules, but the most restrictive one, and the one that forced Reeves to raise taxes at the budget, is the so -called stability rule.1:22
- This rule requires that by the fiscal year ending 2030, day -to -day spending, which essentially means all government spending apart from capital investments, is met by tax revenues.1:32
- Anyway, to see whether the government is on track to meet this target, every six months, the Office for Budget Responsibility, the UK's independent fiscal watchdog, usually just known as1:42
- the OBR, lays out a forecast.1:51
- This is a bit of a simplification, but for the purposes of this particular fiscal rule, the OBR essentially forecasts two things.1:53
- How much the government is going to take in in taxes in 2030, and how much the government is going to spend on day -to -day expenditures in 2030.2:00
- And, rule D speaking, for the fiscal rule to be met, the first number has to be bigger than the second.2:09
- The difference between these two numbers is euphemistically known as the headroom.2:14
- The problem for Reeves has always been that at her very first budget last year, she only carved out a tiny 10 billion pound headroom.2:18
- This was always a risk, because it meant that even a slight downgrade in the OBR's forecast could wipe out the headroom, and force Reeves to either suddenly raise taxes2:26
- or cut spending.2:36
- This is why, since the OBR's creation in 2010, previous governments have always tried to carve out larger headrooms.2:37
- And, well, this is exactly what happened.2:44
- Six months later at the next forecast, the OBR announced that because the UK economy wasn't doing as well as they originally expected, the headroom had been wiped out.2:47
- This forced Reeves into a sort of emergency budget, but even then, she again only eaked out about 10 billion pounds or so in headroom.2:55
- Again, this wasn't enough.3:04
- And, like that it six months earlier, ahead of this budget, the OBR once again downgraded their forecast, wiping out most of the headroom.3:06
- Broadly speaking, this left Reeves with two options.3:13
- One simple, and one complicated.3:17
- The simple option was just to raise a big pre -existing tax, like income tax.3:20
- This would raise a lot of money, and probably give Reeves enough headroom to avoid being forced into another emergency budget in the near future.3:25
- This would, however, require Labour to break their manifesto pledge to not raise taxes on quote, working people, which is widely understood to preclude increases on income tax, national insurance,3:33
- or VAT.3:43
- The complicated option was to just fiddle with a whole load of minor taxes.3:45
- Using this method, it would be harder to raise a significant amount of money, but it would avoid breaking a manifesto promise.3:49
- In the end, Reeves went for the complicated option, and as such, there are a whole load of tax tweaks.3:56
- So, let's run through some of the most notable ones.4:02
- This includes a freeze in income tax thresholds until 2030, which would otherwise rise with inflation.4:04
- This means something like £10 billion more in income tax for the government, because when inflation and wages rise, more people move into higher bans.4:10
- Although we should note that this is effectively regressive, because it hits poorer people moving into higher bans, and doesn't affect anyone who's already paying the top rate.4:19
- On top of that, there was also a tax increase on salary sacrifice pension contributions, expected to raise about £4 billion.4:28
- New taxes on gambling companies, which are expected to raise about £1 billion.4:36
- A two -point increase to the basic and higher rates of tax on dividends coming in April 2026, which isn't a bad idea given that dividends are currently taxed at4:40
- a lower rate than income.4:49
- A council tax surcharge on houses valued over £2 million coming in in 2028, expected to raise about £500 million.4:51
- A so -called road tax for electric vehicles, charged at 3p per mile from 2028 onwards, and then rising with inflation.4:59
- And finally, there are a number of smaller taxes, including an expanded sugar tax, nicknamed the milkshake tax, a tourism tax, charged at £2 a night for stays in hotels5:07
- and other holiday rentals, and a taxi tax, introducing VATs for private taxi firms.5:17
- All in all, these new taxes will raise something like £26 billion by 2030.5:23
- This would have taken the overall headroom to just over £30 billion.5:28
- But Reeves also announced a number of new spending commitments, including most notably scrapping the two -char benefit cap, and increasing benefits in line with inflation, which took the overall5:32
- headroom down to about £22 billion.5:42
- This is obviously bigger than the £10 billion that Reeves had before, but just not that big by historical standards, and the OBR have warned that the headroom is still5:44
- quote, small, given the uncertainties around its forecast as a result of all of these complex tax changes.5:52
- It's also very possible that some of these taxes don't actually happen.5:59
- After all, you can easily imagine an unpopular labour government shying away from potentially unpopular taxes, like say the new road tax for electric vehicles, when they're due in a6:03
- couple of years time.6:13
- As a final thing, while going for the complicated option might be politically understandable, it is economically suboptimal to say the least.6:14
- Politically, the complicated option allowed labour to stick to their manifesto, and by delaying a lot of these new taxes until 2027 and 2028, helped an embattled government avoid some6:22
- of the immediate political pain.6:32
- But economically, the complicated option has added yet more complexity to the UK's already super complicated tax system.6:34
- When a simple option like raising income tax, which is what Reeves implied she was going to do a couple of weeks ago, would have been cleaner, more progressive, raised6:41
- more money, and pushed down inflation.6:49
- Some of the other budget measures, like the cut to energy levies on energy bills or the freezing of fuel duty, are clearly intended to bring down inflation.6:52
- But they achieved this by reducing rather than raising tax receipts, and had yet more complexity to the tax system.7:00
- Moreover, it's not even clear that this will work politically.7:07
- As older viewers might remember, George Osborne's attempt at a similar smorgasbord budget back in 2012 backfired spectacularly, sparking a stream of unflattering headlines about specific taxes, like the infamous7:11
- Pasty Tax, and ultimately being nicknamed the Omni -Shamble's budget.7:22
- All in all, this has put Starmer's government in a dangerous position, something we discuss in our article about the main thing Starmer needs to do in order to maintain7:27
- power, as well as our piece about the threat that labour faces from parties to their left, like the Greens.7:35
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