TL;DR –
Budget 2025: Three things Rachel Reeves’s speech boils down to – and two tricks the chancellor will fall back on
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Weak Economic Growth: Britain’s productivity growth remains sluggish, leading to reduced tax revenue for the government.
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Unrealised Cuts: The Chancellor failed to implement promised welfare cuts, creating a significant financial shortfall. Don’t forget this is a Labour government.
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Limited Responses: Rachel Reeves faces constraints on fiscal measures, leading to reliance on complex approaches for raising revenue without traditional tax hikes.
- What are the limitations: The main limitations come from the banks, if the Chancellor starts making cuts the City will react.
- 12.5% of tax revenue was paid as interest to the banks: HMRC collected £858.9 billion in taxes in 2024 to 2025 out of that The UK government’s interest payments on central government debt were £105.2 billion for the financial year 2024-2025 (Almost the same as we spend on education)
3 Key factors and 2 tricks to watch out for in Today’s Budget 2025
This is going to be a big budget – not to mention a complex budget. As the speculation and leaks will all be revealed later today. Chancellor Rachel Reeves is expected to increase a range of taxes when she delivers her Budget at 12:30 GMT
It could, depending on how it lands, determine the fate of this government. And it’s hard to think of many other budgets that have been preceded by quite so much speculation, briefing, and rumour.
All of which is to say, you could be forgiven for feeling rather overwhelmed.
But in practice, what’s happening today can really be boiled down to three things.
1. Not enough growth
The first is that the Economy is not growing as fast as many people had hoped. Or, to put it another way, Britain’s productivity growth is much weaker than it once used to be.
The upshot of that is that there’s less money flowing into the exchequer in the form of tax revenues.
2. Not enough cuts
The second factor is that last year and this, the chancellor promised to make certain cuts to welfare – cuts that would have saved the government billions of pounds of spending a year.
But it has failed to implement those cuts. Put those extra billions together with the shortfall from that weaker productivity, and it’s pretty clear there is a looming hole in the public finances.
3. Not enough levers
The third thing to bear in mind is that Rachel Reeves has pledged to tie her hands in the way she responds to this fiscal hole.
She has fiscal rules that mean she can’t ignore it. She has a manifesto pledge which means she is somewhat limited in the levers she can pull to fill it.
Put it all together, and it adds up to a momentous headache for the chancellor. She needs to raise quite a lot of money and all the “easy” ways of doing it (like raising income tax rates or VAT) seem to be off the table.
What are her tricks to watch out for?
If the rumours coming out from Westminster are to be believed, she will fall back upon two tricks most of her predecessors have tried at various points, namely those used by George Osbourne. Give with one hand and take with other.
First, she will deploy “fiscal drag” to squeeze extra income tax and national insurance payments out of families for the coming five years.
What this means in practice is that even though the headline rate of income tax might not go up, the amount of income we end up being taxed on will grow ever higher in the coming years.
Second, the chancellor is expected to squeeze government spending in the distant years for which she doesn’t yet need to provide detailed plans.
Together, these measures may raise somewhere in the region of £10bn. But Reeves’s big problem is that in practice she needs to raise two or three times this amount.
