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The United Kingdom is set to unveil its annual budget on Wednesday against a backdrop of poor public finances and widespread public discontent with the governing Labour Party.<\/p>\n
UK Chancellor Rachel Reeves faces the onerous task of\u00a0restoring the public finances to health, while upholding a number of pledges that leave her with little manoeuvring room on taxes and spending.<\/p>\n list of 4 items<\/span>end of list<\/span><\/section>\n Economists say that Reeves will have little choice but to compromise on her plans as she faces what a leading think tank has dubbed an \u201cimpossible trilemma\u201d.<\/p>\n The UK has struggled with weak economic growth, high inflation and a rapidly expanding national debt for years.<\/p>\n After Germany, the UK has had the weakest economic performance among the Group of Seven (G7) countries in the post-COVID era.<\/p>\n GDP grew just 1.7 percent from the final quarter of 2019 to the first quarter of 2024, compared with 8.7 percent in the US, 5.1 percent in Canada, and 4.6 percent in Italy, according to government data.<\/p>\n While Labour promised to revive the economy upon its election in a landslide victory in July last year, economic conditions continue to be difficult.<\/p>\n While the economy had a strong start to 2025 \u2013 putting the UK on track to be the best-performer in the G7 after the US \u2013 growth slowed to a meagre 0.1 percent in the quarter ending in September.<\/p>\n At the same time, the UK\u2019s borrowing costs have soared, with the interest rate on long-term government bonds in September hitting its\u00a0highest level in nearly 30 years.<\/p>\n In October alone, the UK government borrowed 17.4 billion pounds\u00a0to cover the gap between tax revenues and spending.<\/p>\n Reeves, whose Labour Party campaigned against spending cuts after years of austerity policies under the Conservatives,\u00a0has\u00a0made the already difficult task of drafting her budget more challenging with a number of self-imposed pledges.<\/p>\n Reeves\u2019s \u201cfiscal rules\u201d dictate that the exchequer should balance day-to-day spending and reduce the national debt by 2029-30 \u2013 all without raising income tax, VAT or national insurance.<\/p>\n Reeves raised taxes by about 40 billion pounds ($52.6bn) in last year\u2019s budget \u2013 the biggest hike in revenue-raising measures in decades \u2013 in what she cast as a one-off dose of pain needed to put the government\u2019s finances on an even keel.<\/p>\n Despite the tax hikes, Reeves has once again found herself facing a major shortfall between spending and revenues amid the rising cost of government borrowing.<\/p>\n National Institute of Economic and Social Research, one of the UK\u2019s top think tanks, estimated earlier this year that Reeves would need to find another 41.2 billion pounds to meet her targets \u2013 leaving her with the \u201cimpossible trilemma\u201d of higher taxes, reduced spending or amended fiscal rules.<\/p>\n Other estimates, including more recent assessments based on improved economic data, have put the fiscal \u201cblack hole\u201d closer to 20 billion pounds ($26.3bn).<\/p>\n \u201cI do think it is a particularly challenging budget in that the Government is caught between their commitments to avoiding deep cuts to public services, not raising taxes for working people, and self-imposed fiscal rules and a jittery bond market,\u201d Jasper Kenter, an economics professor at Aberystwyth University in Wales, told Al Jazeera.<\/p>\n \u201cThey are also suffering from major hangovers from the last government, who put in place significant tax cuts to national insurance shortly before they left as a failed electoral stunt.\u201d<\/p>\n After backtracking on an income tax hike that would have broken Labour\u2019s manifesto pledge, Reeves is expected to announce other revenue-raising measures, including a tax on properties worth more than 2 million pounds ($2.6m) and a freeze on adjustments to the income tax thresholds.<\/p>\n In the lead-up to the budget, Labour\u2019s standing in the polls has plummeted, falling far behind the right-wing populist Reform UK.<\/p>\n Costas Milas, an economics professor at the University of Liverpool, said Reeves had exacerbated the UK\u2019s economic difficulties with conflicting signals in the run-up to the budget.<\/p>\n \u201cInvestors are unwilling to invest in the economy until they see what economic measures she will actually implement,\u201d Milas told Al Jazeera.<\/p>\n \u201cConsumers are also worried and therefore hesitant to consume and spend, at least until they see what extra taxes they will be faced with.\u201d<\/p>\n Some of the UK\u2019s difficulties stem from factors shared by almost all developed economies, in particular, falling birth rates and rising welfare bills.<\/p>\n But more so than many of its peers, the UK has had a longstanding problem with low labour productivity growth.<\/p>\n In 2023, the UK\u2019s labour productivity (GDP per hour worked) placed it fourth among the G7 nations.<\/p>\n However, productivity growth in the UK has lagged behind its peers in recent decades.<\/p>\n GDP per hour worked in the UK grew only about 6 percent from 2007 to 2022, according to OECD data, compared to 17 percent in the United States, 12 percent in Japan and 11 percent in Germany.<\/p>\n Economists have blamed the productivity gap on years of chronic underinvestment resulting from austerity policies introduced in the wake of the 2007-08 global financial crisis.<\/p>\n According to a PwC analysis of World Bank figures, the UK\u2019s investment spending from 2017 to 2021 was equal to 18 percent of GDP, compared with 25 percent of GDP in Japan, 23 percent in France and 21 percent in the US.<\/p>\n Brexit has been widely blamed for exacerbating the post-financial crisis trend.<\/p>\n The UK\u2019s Office for Budget Responsibility has estimated that the UK\u2019s exit from the bloc will reduce\u00a0long-term productivity by 4 percent.<\/p>\n Jonathan Daniel Portes, an economist at King\u2019s College London, said the UK needed to tackle long-run structural problems, including by undertaking \u201cpro-growth tax reform\u201d and \u201creversing anti-growth policies on immigration and universities\u201d.<\/p>\n \u201cI expect significant tax rises but no major tax reform. I don\u2019t think it will make a huge difference,\u201d Portes told Al Jazeera, describing his expectations for the budget.<\/p>\n Michael Ben-Gad, a professor of economics at City St George\u2019s, University of London, said the UK could benefit from tinkering with the tax system, but it will be unable to avoid reforms to its welfare state over the longer term.<\/p>\n \u201cPay-as-you-go national pension schemes were designed for a growing population or at least one that was stable,\u201d Ben-Gad told Al Jazeera.<\/p>\n \u201cNo one anticipated either below replacement fertility or the lengthening of life-spans when modern welfare states were introduced.\u201d<\/p>\n<\/div>\n The United Kingdom is set to unveil its annual budget on Wednesday against a backdrop of poor public finances and widespread public discontent with the governing Labour Party. UK Chancellor Rachel Reeves faces the onerous task of\u00a0restoring the public finances to health, while upholding a number of pledges that leave her with little manoeuvring room […]<\/p>\n","protected":false},"author":1,"featured_media":3323,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-3322","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-explained"],"_links":{"self":[{"href":"https:\/\/inernews.online\/index.php?rest_route=\/wp\/v2\/posts\/3322","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/inernews.online\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/inernews.online\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/inernews.online\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/inernews.online\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3322"}],"version-history":[{"count":0,"href":"https:\/\/inernews.online\/index.php?rest_route=\/wp\/v2\/posts\/3322\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/inernews.online\/index.php?rest_route=\/wp\/v2\/media\/3323"}],"wp:attachment":[{"href":"https:\/\/inernews.online\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3322"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/inernews.online\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3322"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/inernews.online\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3322"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Recommended Stories <\/h2>\n
Why is this budget so challenging for the UK government?<\/h2>\n
Why has the UK economy struggled in recent years?<\/h2>\n
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