Insights

This afternoon Chancellor Rachel Reeves delivered the first Labour budget for 14 years. The top line is that spending on public services will increase by £55 billion and capital investment by £23 billion, paid for in the most part by the largest increases in taxes for a generation.

Reeves’ speech was littered with references to difficult choices and the tough road ahead, echoing the last Budget delivered by a Labour chancellor in March 2010. In that Budget, Alistair Darling was battling to stabilise the UK economy following the 2008 crash. Darling didn’t have the luxury of being able to blame the previous Chancellor, who was of course sat next to him. Reeves took full advantage of being able to blame her predecessors, but being the new kid on the block comes with other burdens, chiefly the burden of expectation.

Labour ran on a promise to change politics and improve public services, and to govern as pro-business and pro-worker. Balancing these expectations will be key to this government’s success and chances of victory at the next election. Budgets always unravel in the days and weeks following, and with so many changes there will be plenty to keep hacks occupied.

Key takeaways

1. Working people have been defined: payslip workers

It may not be ready for the Oxford English Dictionary, but we can be clear after today who Labour’s ‘working people’ are. Reeves’ pledge not to increase the Income Tax, National Insurance or VAT paid by workers has been honoured, and possibly the only rabbit in today’s budget was that Labour will unfreeze tax thresholds beyond 2028, meaning an end to fiscal drag. Extending the freeze on fuel duty and cutting tax on pints are two other decisions that have been made with this group of lower and middle earners in mind.

2. A budget for the NHS

The NHS consistently polls as the number one public concern. So perhaps unsurprisingly almost half of the additional public spending announced today is for the NHS, and it receives 68 mentions in the Budget document. The vast majority of funding for day-to-day spending is to help meet the pledge to cut waiting times – a key metric that the government will be judged on by the public. Not insignificant is a real terms increase for local governments to deliver essential services – with increasing numbers of councils on the brink of bankruptcy, Reeves will be hoping this can ease the burden.

3. The City has lobbied effectively, with more battles to come

There will be relief in the City that the increases to Capital Gains Tax are not as high as expected, and that there is only a 4% increase to carried interest, symbolising a big win for City lobbyists. The war isn’t over though, with another battle on the horizon hidden away on Page 49 of the budget document:  “From April 2026, carried interest will be taxed fully within the Income Tax framework, with bespoke rules to reflect its unique characteristics”. What these ‘bespoke rules’ look like will be subject to intense lobbying between now and the next Autumn budget.

4. Growth still the big test

Everyone expects a Labour government to invest in public services. The big test for this government is to generate growth and, on that measure, the jury is still out. The government seems at risk of missing its target to be the fastest growing economy in the G7 by 2029, with the OBR now predicting the average growth will slow from 2026. Labour will be hoping its infrastructure investment, modern industrial strategy and National Wealth Fund will generate major investments, but without more concrete proposals it seems unlikely that this pre-election pledge will be met.

Announcements by sector

Business and industry

• An increase in employers NI by 1.2% to 15% from April 2025, and lowering the threshold that firms start paying NI on workers earning from £9,100 to £5,000.
• Increasing the employment allowance from £5,000 to £10,500.
• From 2026-27 permanently lower tax rates will be introduced for retail, hospitality & leisure (RHL) properties. Plus, for 2025-26, 250,000 RHL properties will receive 40% relief on their bills, up to a cash cap of £110,000 per business.
• A Corporate Tax Roadmap will be published which confirms the cap of corporation tax at 25% and maintaining full expensing.
• The Small Business Tax multiplier will be frozen next year.
• Cutting draft duty by 1.7%
• Increase the soft drinks industry levy to account for inflation and increasing the duty in line with CPI.
• Maintaining asset disposal relief at £1 million, and will remain at 10% this year and rising to £14% next year and 18% from 2026/27.
• Introducing a single adult wage rate phased in over time by initially raising the national minimum wage for 18–24-year-olds by 16.3%.
• Increase the national living wage by 6.7% to £12.21 an hour.
• VAT, income tax and NI will not increase for working people.
• Will capitalise the National Wealth Fund to invest in “industries of the future”.
• Confirmed multi-year funding commitments for high growth potential sectors including £1 billion for aerospace sector to fund R&D, £2 billion for the automotive sector and up to £520 million for life sciences innovative fund.

Financial services

• The fiscal rules will be reformed to use a public sector net liability debt (PSNL) measure, deducting financial state assets from public sector debt.
• Like the fiscal stability rule, PSNL will be required to be falling over a three-year horizon.
• Adopting PSNL will increase the Exchequer’s fiscal headroom to £15.7 billion by 2027/28.

Energy and environment   

• £3.9 billion in 2025/26 for Carbon Capture, Usage and Storage Track 1 projects to decarbonise industry and contracts with 11 green hydrogen producers
• £3.4 billion over three years for the Warm Homes Plan
• Increase in the Energy Profits Levy to 38%
• £25 million to the Welsh Government for the maintenance of coal tips

Tech and digital  

• Government investment in R&D will be protected, with more than £20 billion of funding.
• The Innovation Accelerator Programme in Glasgow, Manchester, and the West Midlands will be extended.
• With over £500 million for next year, Tech Secretary Peter Kyle will continue to drive progress in improving reliable, fast broadband and mobile coverage across the country, including in rural areas.

Defence

• Total increase to the Ministry of Defence budget of 2.9 billion next year to ensure the UK exceeds its NATO commitments.
• Guaranteed military support to Ukraine of £3 billion a year for “as long as it takes”.

Transport  

• Freezing of fuel duty and maintaining of the 5p cut
• Increase to Air Passenger Duty, especially for private jets.
• £3 bus fare cap and £650 million for local transport.
• Delivery of HS2 from Birmingham to Euston.
• £500 million for road maintenance and potholes.

Health and social care   

• Pledged up to £520 million for a new Life Sciences Innovative Manufacturing Fund.
• Protect investment in R&D with more than £20 billion worth of funding, including £6.1 billion to protect core research funding for areas like engineering, biotechnology and medical science.
• £22.6 billion increase in the day-to-day health budget, and a £3.1 billion increase in the capital budget, over this year and next year.
• Committed £1 billion of health capital investment to address the backlog of NHS repairs and upgrades.
• Committed a further £1.5 billion for new beds in hospitals, new capacity for over a million additional diagnostic tests and new surgical hubs and diagnostic centres.
• Renew the tobacco duty escalator for the remained of this Parliament at RPI plus 2%, increase duty by a further 10% on hand-rolling tobacco this year, and introduce a flat rate duty on all vaping liquid from October 2026 alongside an additional one-off increase in tobacco duty.
• Delivery of a real terms funding increase for local governments next year, including £1.3 billion in additional funding to deliver essential services with at least £600 million in grants funding for social care

Education   

• From 1 Jan 2025, VAT will apply to all education, training and boarding services provided by private schools.
• Tripling in investment for school breakfast clubs.
• Increase the core schools budget by £2.3 billion next year to hire more teachers.
• An additional £300 million of funding for further education.
• £1 billion for SEND education, which represents a 6% uplift in real terms compared with this SEND funding for this year.
• £6.7 billion in capital investment for the Department for Education – a 19% real terms increase.
• This includes £1.4 billion to rebuild 500 school in the greatest need of rebuilding.
• £2.1 billion to improve school maintenance, £300 million more than this year.

Employment and welfare   

• Accept the Low Pay Commission recommendations to increase the National Living Wage by 6.7% to £12.21.
• Increase the Carer’s Allowance weekly earnings limit to 16 hours at the National Living Wage, hence carers can earn over £10,000 per year.
• Deliver £1 billion to extend the Household Support Fund.
• Reduce the debt repayments that can be taken from Universal Credit each month from 25% to 15% of the standard allowance. 1.2 million of poorest households will keep more of their award each month, with those who benefit gaining an average of £420 per year.
• Raise the state pension by up to £470 in line with the Triple Lock.

Housing   

• Residential capital gains tax will be unchanged.
• Increasing the rate of Stamp Duty Land Tax for second homes by 2% to 5%.
• £5 billion for housing investment, including £3.4 billion for the AHP next year
• Reduced right to buy discounts and 100% retention of right to buy receipts for local authorities.
• A social housing rent settlement of CPI + 1% for the next five years.
• The hiring of “hundreds” of new planning officers
• £1 billion of investment to remove dangerous cladding next year.
• Deliver £230 million to tackle homelessness and rough sleeping.

Local government   

• A real-term funding increase for local government, including a £1.3 billion increase in grant funding.
• Greater Manchester and the West Midlands would receive integrated settlements from next year.
• The largest real-terms funding settlements for the devolved Administrations since devolution and city and growth deals in Northern Ireland.