A Major Moment for the British Economy: What to Watch in the U.K. Budget

Rachel Reeves, the top economic official in an increasingly unpopular government, will appear in Parliament to present tax and spending plans.

Rachel Reeves, Britain’s embattled chancellor of the Exchequer, will present her second annual budget to Parliament on Wednesday. She is preparing to face down critics who say that since she became Britain’s top economic official last year, she has been unable to speed up growth and has become too beholden to self-imposed rules on debts and deficits.

The presentation of the government’s tax-and-spending plan is a major event in the political calendar, and this year’s edition is particularly critical for Ms. Reeves and Prime Minister Keir Starmer. Despite the Labour Party leaders’ large parliamentary majority, their approval ratings have sunk to record lows.

Ms. Reeves is expected to announce a welter of tax increases alongside some spending cuts and measures intended to ease the high cost of living. She will be guided by the principles of “fairness and opportunity,” she has said.

Earlier this month, Ms. Reeves said it would be a “difficult” budget. “The economic circumstances have declined, deteriorated, since a year ago,” she said.

Why is this budget so important?

The chancellor has mostly blamed the global economic environment for the tough choices she faces, citing the upheaval caused by President Trump’s tariffs and the war in Ukraine, among other factors. But economists argue that she hasn’t done enough to insulate the public finances from external events.

In her first budget, Ms. Reeves raised taxes by about 40 billion pounds ($53 billion), increased spending on public services and raised capital investments over the next five years by £100 billion. It was “one of the largest increases in spending, tax and borrowing of any single fiscal event in history,” Richard Hughes, the chair of the Office for Budget Responsibility, an independent watchdog, said at the time.

“This is not a budget we would want to repeat,” Ms. Reeves said at the time.

But the chancellor left a buffer against her fiscal rules, which require debt reduction, of less than £10 billion, small by historical standards. That leeway was erased in the past year and could be eroded further by a downgrade in the forecast for productivity growth by the fiscal watchdog. That downgrade would mean that Britain’s economy is projected to grow more slowly, generate less tax revenue and make it harder to bring down the debt.

And so Ms. Reeves will have to return to Parliament with another set of tax increases.

What are the biggest expected changes?

The government has reportedly backed away from a plan to raise income tax rates, which would have broken a pre-election promise. Instead, Ms. Reeves is expected to freeze the thresholds at which different tax rates apply, instead of rising with inflation.

This would extend a move made by Rishi Sunak when he was chancellor under a Conservative Party government and is considered a somewhat stealthy way to raise a relatively large amount of revenue. As people’s incomes grow because of inflation or wage increases, more of them are pulled into higher tax brackets.

An assortment of other tax increases is expected, with the burden mostly falling on wealthier people. This has been described as the “smorgasbord” approach.

What else may be included in the ‘smorgasbord’ of policy plans?

A key question is whether Ms. Reeves will eliminate the two-child benefits cap, which prevents larger families from getting additional government aid. Though charities have criticized the policy’s effect on child poverty, it would cost several billion pounds to remove.

Other changes announced by Ms. Reeves may include how pension contributions are taxed, adjustments to inheritance taxes and higher taxes on people with the most expensive homes, a so-called mansion tax. There could also be smaller changes, such as including milkshakes in a tax on sugary drinks and raising taxes on driving electric vehicles.

Though the emphasis has been on tax increases, the chancellor has said this budget has also been designed to lower inflation. One way to achieve this could be measures to lower energy bills.

A few changes have already been announced, including increasing the national living wage, a type of minimum wage, by 4 percent for people over 21. The government said it would increase the minimum wage 8.5 percent for workers ages 18 to 20, as part of its efforts to shift economic benefits more toward young people.

How will the markets react?

Whether this budget is considered a success could ultimately be decided by bond investors. Britain faces the highest borrowing costs among Group of 7 countries and is spending £1 in every £10 on debt interest.

Ms. Reeves has said she is determined to bring this down.

Market moves this year have implied that investors approve of what she has called her “ironclad” fiscal rules to reduce Britain’s debt burden. Any signs of laxer policy have been punished with higher bond yields.

“There has to be some signal from Reeves that buys her some credibility at this point,” said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, an investment firm. “When you’re squeezed into a corner,” he added, “you can capitulate or you can come out and be aggressive.”

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