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The United Kingdom took another leap down the path of socialist decline when Chancellor of the Exchequer Rachel Reeves outlined her new budget on Wednesday. Reeves, the U.K.’s powerful equivalent of the Treasury Secretary, is a top ally of Prime Minister Keir Starmer.
The new budget is a textbook example of “tax and spend” governance. It brings a number of big tax hikes, generous new welfare policies, and no restraints on out-of-control spending. Starmer and Reeves claim that this budget has “fairness” as its cornerstone. In reality, it only reinforces the U.K.’s status as a place where, while hard work and risk-taking are penalized with increasingly punitive taxes, slothfulness and excuses are rewarded with seemingly limitless government handouts.
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America’s closest ally is in a deep fiscal hole, with spending far exceeding revenue. The key causes of this deficit are well understood: anaemic economic growth that has been unable to cope with increasingly generous government outlays on welfare, Social Security and the country’s National Health Service socialized medical system. High inflation has also cut into paychecks and increased borrowing costs. The cost of living is further exacerbated by soaring energy bills, a 20% sales tax, and the expense of transportation (an annual rail pass covering London and its immediate suburbs costs $3,400). Repeated strikes by resident doctors and train drivers have also plagued Britons this year, for example. While it is plainly in the U.K. national interest that the unions be brought to heel, Starmer instead rewards them.
The U.K. is thus today defined by its people’s growing disenchantment. Starmer’s Labour Party government is understandably coming under rapidly increasing pressure. Starmer himself is extraordinarily unpopular with voters, with a poll last month citing that his approval rating stands at just 21%. He faces the growing prospect of a leadership challenge from within his own party. Unfortunately for the prime minister, Reeves’s budget will only further undermine his premiership.
Key elements of the new budget include:
- Freezing income tax rate thresholds and national insurance (U.K. Social Security equivalent) tax rate thresholds for an additional three years. Inflation means that this will drag lower earners into the U.K.’s higher tax brackets. Income exceeding $66,500 is currently taxed at a rate of 40%, and income exceeding $166,000 is taxed at a rate of 45%. This will now remain the case until 2031. This means that an income of $100,000 will result in a post-tax receipt of just $72,000. Similarly, an income of $150,000 will see a post-tax receipt of $97,400, and an income of $300,000 a take-home amount of $174,000. Oh, and U.K. residents also pay an average of $3,000 in additional annual local tax payments.
- A much-higher-than-inflation increase to the minimum wage, a move that numerous experts believe will further depress hiring of younger and less experienced workers. At the same time, the independent government budget office has downgraded the economic growth forecast for 2026 from 1.9% to 1.4%.
- New, additional property taxes on high-value homes. New taxes on electric vehicles, gambling, pension contributions, and new limits on tax-free savings. On the welfare side of the ledger, Reeves has approved above-inflation increases to U.K. Social Security payments and the removal of the two-child cap on child benefit payments to families.
Put simply, this is a budget that further penalizes work to increase benefits for those who do not work. Consider the tax calculations above, made using the U.K. government’s income tax estimate website, and ask yourself whether this seems like a society in which risk-taking and capitalist dynamism are rewarded. Indeed, Reeves’ budget means that the U.K.’s tax-to-GDP ratio will increase to 38.3%, a level not seen since the end of the Second World War in 1945. For comparison, the U.S. tax-to-GDP ratio is approximately 25%.
Still, the budget has galvanized Labour’s political opposition.
Take Conservative Party leader Kemi Badenoch. She has been under growing pressure amid surging poll numbers for Nigel Farage’s Reform Party. But Badenoch won praise for her scathing criticism of Reeves on Wednesday. If the U.K. is to emerge from this economic malaise, it will need bold new leadership in the form of former Conservative Prime Minister Margaret Thatcher. Thatcher saved the U.K. from socialist ruin and set it upon a course of capitalist prosperity in the late 1980s, 1990s and early 2000s. Badenoch has finally shown at least a hint of that potential. She’s sure to have more opportunities in the future.
After all, it’s now abundantly clear that Starmer is determined to keep up its tax and spend strategy until it is voted out of office. Nor is there any question that this strategy is rooted in a deeper ideological impulse of socialist thought. Welfare remains protected against even the mildest reform. This follows a political debacle earlier this year, when Reeves announced very mild welfare reforms and faced a revolt by Labour backbench parliamentarians. Instead of standing firm, Starmer and Reeves abandoned the reforms. This isn’t sustainable.
As I noted recently, “No serious economist believes the United Kingdom’s ballooning welfare budget is sustainable amid very poor productivity rates and an aging population. Consider, for example, that an extraordinary 1.7 million Britons are now receiving unemployment benefits out of a total population of 69 million. An increasingly large number of young people are now neither in work-related training nor seeking active employment.”
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Where does this leave the U.K.?
Well, Reeves says that her budget will restore market confidence and stabilize borrowing rates. Perhaps in the short term, her new tax revenue will accomplish that task. But it will do so only in the short term. In the longer term, the Chancellor will only fuel market fears that the U.K. intends to keep taxing and spending at a growing cost to productivity and economic growth.
No wonder, then, that Farage and now Badenoch are feeling energized. The British government’s left-wing whirlwind of incompetence opens the prospect for seismic political change. It’s a shame that Labour’s majority in parliament means an election is unlikely before the August 2029 deadline.
