UK budget: tax increases and new fiscal rules

The new Labour government promised to “restore stability” of the UK economy. In this spirit t he chancellor announced £40bn of tax rises, yet not directly on “ working people ” . Higher day-to-day spending will be financed by higher taxes, and there will be more borrowing to pay for long-term investment spending. The government has announced three new fiscal targets, with the new debt measure giving the government £ 15.7 bn of fiscal headroom by 2029-30 , not significantly more tha n £8.9bn under the Conservative government. UK inflation will be higher this and next year compared to the OBR’s forecasts from March, while GDP growth will be lower from 2026 onwards. Overall , the “ wider” measures , while allowing for more investment , will not lead to higher GDP growth over the forecast period as indicated by the new OBR projections . Meanwhile, h igher taxes on employe r s are likely to weigh on future profits, hirings and pay settlements , undermining growth. Also, n ew deficit and debt rules do not change the UK’s fiscal reality . H igher borrowing even if for long-term investment will likely imply higher borrowing costs. Also, higher forecasts for inflation and lower forecasts for growth point to a more gradual monetary policy cutting cycle in the period ahead.