The 2025 Budget represents a decisive move away from austerity and a typical tax-and-spend Labour budget, with tax increases worth £26bn and the scrapping of the two-child benefit cap.
Reeves’s Announcement in Parliament:
The announcement began shambolically, with the OBR accidentally leaking the full “Economic and Fiscal Outlook” report before Reeves gave her Budget speech in the Commons. However, despite this error and all the previous speculation leading up to Reeves’s announcement, this seems to have gone down as a rather standard Labour tax and spend budget.
The most significant measures include freezing income tax thresholds until 2030, implementing a new “Mansion Tax”, and increasing taxes on property, savings and dividends. On the spending side, the most notable policies are abolishing the two-child benefit cap from 2026, raising the minimum wage, and freezing both rail fares and NHS prescription charges for another year.
According to Rachel Reeves, the budget combines redistribution toward low- and middle-income households with targeted taxation on income, assets and consumption, positioning fiscal responsibility and social investment as complementary rather than contradictory goals. She argues that those with the broadest shoulders must bear the biggest burden, and that is exactly what this budget does, with the top 10% of earners shouldering the extra tax burden, rather than the vulnerable.
Furthermore, Reeves took a jab at all three major opposition threats to Labour. She first attacked the Tories: “they left classrooms crumbling and waiting lists sky-high; weakened our productivity and choked our economic growth". She then moved on to Reform, who she says “promise more than £100bn of cuts with no detail on where those cuts will come from". Finally, she also took a jab at Green Party leader, Zack Polanski, stating that “unfortunately, the only things getting bigger under his approach would be the deficit and the rate of inflation”.
On the other hand, the Leader of the Opposition, Kemi Badenoch, described the Budget as a “total humiliation”. She argued taxpayers are being repeatedly asked to pay more, referencing that the Chancellor had previously declared no more big tax rises, yet the 2025 Budget returns with multiple new taxes. Badenoch argued that working people will merely pay for larger welfare spending to keep her backbenchers happy, and she joked in parliament that the Labour Party should be renamed the “Welfare Party”.
The Liberal Democrats leader, Ed Davey, also critiqued the government’s approach, arguing that “you can't tax your way to growth” and that the only solution to the rising tax burden is a new trade deal with Europe.
Macroeconomic Outlook:
The OBR delivered a more optimistic forecast ahead of the budget:
- ● Government headroom is expected to reach £22 billion, more than double the figure at the last fiscal event.
- ● GDP growth for 2025 has been upgraded from 1% to 1.5%.
- ● The Budget is forecast to move from a £28.8bn deficit to a £3.9bn surplus by 2028–29.
- ● Net financial debt is projected to fall to 82.2% of GDP by 2030–31.
- ● Borrowing as a share of GDP is set to decline every year of the forecast period.
Taxation: A Revenue-Raising Strategy:
To fund new spending commitments and deliver fiscal consolidation, the Budget raises £26 billion in additional taxes by 2029–30.
Personal and Household Income
- ● Income tax thresholds frozen until 2030/31, raising £8.3bn.
- ● Personal tax and employer NI thresholds frozen from 2028–29, raising a further £8bn.
- ● Salary-sacrificed pension contributions above £2,000 to incur NI from April 2029, raising £4.7bn.
- ● ISA allowance for under-65s reduced to £12,000, with £8,000 ring-fenced for investment.
Wealth, Property and Investment
- ● Dividend, savings and property income tax rates to rise by 2pp, raising £2.1bn.
- ● A new council tax surcharge (“mansion tax”) on homes worth over £2m, generating £0.4bn: Properties worth more than £2mn will face a 2.5k annual charge, rising to 7.5k for properties worth more than £5mn.
Business and Sector-Specific Taxation
- ● Mileage-based tax on electric vehicles to begin in 2028, raising £1.4bn.
- ● Changes to gambling taxation to raise £1.1bn, including Remote Gaming Duty rising from 21% to 40%.
- ● Fuel duty frozen until next September, partially offsetting tax rises elsewhere.
- ● Writing-down allowance in corporation tax reduced, raising £1.5bn.
Cost of Living Support:
While the Budget leans heavily on tax increases, it also delivers targeted support aimed at easing pressure on household finances and improving wages.
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- ● The two-child benefit cap will be abolished from April 2026, costing £3bn and boosting income for 560,000 families by an average of £5,310.
- ● Scrapping the ECO energy scheme and removing some levies from bills, leading to a cut of roughly £150 a year to the average household energy bill from April 2026.
- ● The minimum wage will rise to £12.71 for over-21s and £10.85 for workers aged 18–20.
- ● NHS prescription charges frozen for another year in England.
- ● Rail fares in England frozen for the first time since 1996.
Investment and National Strategy:
Local empowerment and long-term investment are core pillars of the government’s approach. Plus, a significant component of the Budget is designed to improve productivity and opportunities for young people.
- ● £13bn in flexible funding for seven English mayors
- ● Additional funding for Regional Governments: £370m for Northern Ireland, £505m for Wales and £820m for Scotland.
- ● More than 750,000 retail, hospitality and leisure properties to receive permanently lower business rates.
- ● Defence spending will rise to 2.6% of GDP by April 2027.
- ● Reforms to public administration: Cutting Police and Crime Commissioners and selling government assets is expected to generate £4.9bn in efficiencies by 2031.
- ● The chancellor says the government has also managed to chase down almost £400m from "dodgy pandemic spending and contracts".
- ● Apprenticeship training for under-25s will become free for SMEs.
- ● A £820m Youth Guarantee will be launched over three years to support training and employment.
Sources:
https://www.gov.uk/government/publications/budget-2025-document
https://www.bbc.co.uk/news/live/cy8vz032qgpt