Reeves changes debt rules as Budget draws near

Chancellor Rachel Reeves has revealed a change to Britain’s debt rules that will open the door for the government to spend up to £50 billion extra on infrastructure projects. The Chancellor told the International Monetary Fund in Washington that her first Autumn Budget will include a new method for assessing the UK’s debt position – a move that will permit the Treasury to borrow more for long-term capital investment.

The announcement capped off weeks of speculation leading up to what is likely to be a seismic Budget on 30 October. Here, we look at what the Chancellor’s speech might hold for taxpayers and businesses.

Billions and billions

Even before the date of the Budget was announced, the scene was set by when Ms Reeves told Parliament that Treasury analysis had revealed a £22 billion black hole in the UK’s public finances.

However, Paul Johnson, Director of the Institute for Fiscal Studies (IFS), has warned that the true figure is even higher. During July’s General Election he said that main parties’ tax-and-spend pledges represented a ‘conspiracy of silence’ on the true picture of the country’s finances.

According to the IFS, the Chancellor has an estimated £25 billion black hole to fill in order to meet Labour’s spending commitments. However, some press reports claim that the Ms Reeves will aim to raise as much as £40 billion through tax rises and spending cuts.

Manifesto commitments

The Chancellor has already that she will stick to Labour’s manifesto pledge and ‘will not increase National Insurance, the basic, higher or additional rates of income tax or VAT’.

So Ms Reeves will have to train her fire on other targets for tax-raising measures.

CGT and employer NICs

Much of the pre-Budget speculation has centred on possible increases to Capital Gains Tax (CGT) and employers’ National Insurance contributions (NICs).

CGT is payable by individuals, but also self-employed sole traders, partners in business partnerships and company owners, among others, but the rate paid depends on the income of an individual and the type of asset being sold.

Critics point out that the current rates are substantially lower than income tax rates and tend to benefit wealthier people.

Meanwhile, Ms Reeves has refused to rule out a rise in employer NICs in the Budget despite accusations it would break the promises set out in Labour’s manifesto.

Perhaps more concerning for the Chancellor would be the backlash from the UK’s business groups who were unanimous in speaking out against the mooted increase.

Fuel duty to pensions

The Chancellor does have other options for raising revenue, including scrapping the 5p cut on fuel duty as even the RAC says drivers are not gaining any benefit.

Fuel duty has been frozen since 2011 but in 2022 the then Conservative Chancellor Rishi Sunak cut it by 5p per litre. That was extended until March next year.

Corporation Tax (CT) is one of the biggest revenue generators at the Chancellor’s disposal, currently netting around £100 billion a year for the Treasury.

Labour has said it won’t raise the top rate of CT, which is currently 25%. However, there is a complex system of tapered relief in place for smaller businesses. This could be reduced or even removed to increase revenues.

Pensions will be a tempting target for Ms Reeves as higher rate taxpayers currently benefit from 40% tax relief on contributions. There have been press reports that the Chancellor is considering a flat 30% rate of relief. This would impose a 10% hike on the higher rate band that save into a pension.

Ms Reeves may also look at reinstating the Lifetime Allowance that was abolished at the beginning of this tax year.

Business priorities

The UK’s business groups have been busy in the run-up to the Autumn Budget, outlining a range of priorities in their submissions to the Chancellor.

Common themes have included stimulating economic growth, addressing the UK’s skills and labour shortages, reforming business rates and reforming of the off payroll working rules.

They also want to see major investment in infrastructure as well as greater support for the transition to net zero.

Huge moment

Shevaun Haviland, Director General of the British Chambers of Commerce (BCC), says: ‘The first Budget of a new government is always a huge moment to shape the expectations of business and the public for the years ahead.

‘So the Chancellor is right to champion the critical importance of economic growth and investment. Businesses are keen to get more detail on how the government plans to do this, so we can all work to make it happen.’