Rachel Reeves faces a delicate balancing act at her first Budget as Chancellor as she tries to balance the books without breaking Labour’s core promise not to increase taxes on “working people.”
She has consistently warned of the difficult choices ahead, citing the £22 billion “black hole” left by the previous Conservative government.
Here are key measures that people want her to make in the Budget to boost the economy, and whether she is likely to make them.
Business rate cut for hospitality
Cuts to business rates were announced in the 2020 Spring Budget as part of measures to support the hospitality industry following the pandemic.
This relief, however, is due to expire in March 2025, and industry body UKHospitality has warned that businesses will be hit with a total of £928m in extra rates when the cut ends.
Alongside this, there is also the fact that the current business rates system favours retailers operating away from high streets, such as online sellers and those out of two shopping centres. Labour’s manifesto did promise to address this disparity, but it’s not clear when this will take place.
UKHospitality wants Labour to keep its promise of reforming business rates ahead of the near billion pound “cliff-edge” when the current cuts end next year.
Kate Nicholls, chief executive of UKHospitality, claims that the “sector’s ability to both survive and thrive depends on it”.
“This is a sector that has shouldered an enormous amount of cost over the past four years and should be supported to realise its potential to generate significant growth in communities the length and breadth of the UK,” she added.
Is this likely to happen?
Calls for changes to business rates went unanswered at the last Budget and, despite claims it could boost the hospitality sector, it is not expected Ms Reeves will include them in her upcoming Budget.
The biggest issue will likely be cost – the reduction in business rates since 2020 has cost the Treasury around £2.5bn, according to the OBR.
With public finances tight, the question will be whether the Chancellor wants to prioritise high street businesses in her first Budget.
Cuts to VAT on food and drink
Another call from the hospitality sector is for the VAT charged on food and drinks in pubs and restaurants to be cut.
UKHospitality is among the organisations calling for VAT to be reformed, and last month the Wetherspoons pub chain cut the price of all its food and drink by 7.5 per cent for one day as part of its campaign on the same issue.
Wetherspoon’s founder and chairman, Tim Martin, said that one of the biggest issues facing the hospitality industry was that VAT is charged on food in pubs, but not in supermarkets.
“Pubs have been under fantastic pressure for decades, because of the tax disadvantages which they have with supermarkets… It doesn’t make sense for the hospitality industry to subsidise supermarkets,” he said.
He wants to see the VAT rate cut from 20 to 12.5 per cent to help businesses “thrive, invest and create new jobs”.
Is this likely to happen?
The same issues apply here as they do with calls for reduced business rates – costs and priorities.
It’s not clear how much a 7.5 per cent reduction in VAT on food and drink would cost but, for comparison, a temporary 15 per cent cut brought in from September 2021 to March 2022 is estimated to have cost around £4.7bn.
Tax breaks for landlords
Multiple organisations representing landlords have this week sent a letter to the Chancellor calling for tax breaks to help them keep rents from rising and boost the supply of homes.
The letter – signed by the National Residential Landlords Association, Propertymark, Goodlord and Large Agents Representation Group – calls for Reeves to abolish the 3 per cent stamp duty levy applied to homes purchased for rental.
The groups warned that their members are facing “uncertainty on a number of fronts” and require stability and clarity to help address the “severe shortage of homes”.
Is it likely to happen?
Labour repeatedly stated ahead of the election that its priority was building 1.5 million new homes across the next parliament and promised to crack down on “exploitation” in the private rented sector – namely, by banning so-called ‘no fault’ Section 21 evictions.
With this in mind, it seems unlikely that the new Labour Government would prioritise supporting landlords having recently passed the Renters’ Rights Bill, which abolishes “no-fault” evictions.
Cutting stamp duty for downsizers
The issue of stamp duty has come up frequently in past Budgets, but the previous Government left it untouched before the election.
There are now widespread calls for cuts or changes to stamp duty to boost the housing market and help homeowners.
In a report released last week, high-street bank Barclays called for stamp duty to be slashed for older people to encourage them to downsize, which it claims could lead to 3.8 million families being encouraged to move.
Is it likely to happen?
Critics of the scheme suggest that, while this could increase housing supply, the main beneficiaries of such a cut would be wealthier homeowners.
Aneisha Beveridge, head of research at the estate agency Hamptons, told The Times that such a scheme “could potentially create loopholes” and pointed out that “downsizers tend to be mortgage-free or very close to being mortgage-free, and have often been the main beneficiaries of the house price growth witnessed over the last few decades”.
Scrapping the tourist tax
Since the UK left the EU in January 2021, the UK stopped the regime allowing tourists to claim back the 20 per cent VAT on purchases made at selected retailers.
Dubbed the “tourist tax” – there are claims that this extra cost on shopping has driven many tourists to countries such as France where they can take advantage of tax-free regimes.
Earlier this year, multiple businesses including Mulberry, Marks & Spencer, Kurt Geiger and Selfridges also called on Labour to scrap the tax in a bid to boost the economy.
Paul Barnes from the Association of International Retail – which represents firms including Bicester Village and Harrods – claimed that Ms Reeves would be “pleasantly surprised by the billions of pounds of additional spending and tax revenues the real data shows will be generated”.
Is it likely to happen?
There is some debate over whether scrapping the tourist tax would benefit the UK economy.
Analysis by the OBR in 2020 suggested ending VAT refunds for tourists would save the Treasury around £460m a year by 2025, but this has grown to £539m under revised 2024 estimates.
However, a report by forecasters Oxford Economics in 2023 suggested that scrapping the tourist tax would generate £4.1bn annually for the UK economy as a whole and create an additional 78,000 jobs.
Scrapping LISA withdrawal penalties
There have been calls for the Government to change the rules around lifetime ISAs (LISAs) to prevent savers from being hit with a penalty when they withdraw early.
Savers who deposit into LISAs get a 25 per cent bonus from the Government up to £1,000 a year, but can only withdraw funds for their first home or retirement.
Those withdrawing early are hit with a 25 per cent penalty, which can eat into their own capital as well as the Government bonus.
Martin Lewis, founder of consumer site MoneySavingExpert, is among those who have called for this change to take place.
Speaking after the last Budget, he said he was “disappointed” it had not been included and that the previous Chancellor had told him the change needed to wait “until property prices are definitely rising”.
Is it likely to happen?
The previous Chancellor reportedly indicated to Martin Lewis that LISA reform was high on his agenda.
With Labour prioritising boosting home ownership, making this change to LISAs commonly used by first-time buyers could be a very positive step.
Reversing alcohol duty reform
The Conservatives announced in 2021 that the number of tax bands for wine will increase from one to 30, with drinks taxed by their alcohol by volume (ABV) rather than the type.
Due to the administrative burden of this new regime, its implementation was delayed and is now due to take effect on 1 February 2025.
But many wine merchants have warned that the change could lead to the price of wine increasing, and the industry is calling for the Labour Government to scrap the measures, as well as reverse the 10.1 per cent rise in duty brought in last year.
Miles Beale, the chief executive of the Wine and Spirits Trade Association (WSTA), warned that businesses were still reeling from the last increase in duties.
He told The Telegraph: “Increasing duty – which is the Government’s inherited policy – will serve only to reduce income to the Government further at a time it can least afford it.
The WSTA is urging the Chancellor to announce a two-year freeze in duties, which it said would “keep prices stable while optimising government income”.
Is it likely to happen?
Rather than cutting alcohol duty, there have been reports that Ms Reeves is considering increasing alcohol duty as she seeks to raise revenue amid tight public finances.
The Telegraph claims that the Chancellor is considering more “sin taxes” on unhealthy products – such as fast food, tobacco and vapes – to help raise tax receipts for the Treasury.
Tax cuts for working people
Labour repeatedly criticised the previous Government for imposing the highest tax burden on working people in over 70 years and pointed out that Rishi Sunak increased taxes 26 times while Chancellor and Prime Minister.
In his response to the last Budget, Starmer also said that Labour had “campaigned to lower the tax burden on working people for the whole parliament”.
Tax cuts also formed a part of the Conservative Party’s election promises, with Sunak pledging to bring in a further 2p cut in employee national insurance by April 2027.
The party’s manifesto also promised to abolish the main rate of self-employed national insurance entirely by the end of the parliament.
Is this likely to happen?
Labour has been clear, both in public and in its election manifesto, that it won’t increase any taxes on working people.
The exact definition of “working people” has occasionally been up for debate, but we know this pledge will include income tax, national insurance contributions and VAT.
But, equally, it is not expected that the Chancellor will announce any cuts to taxes in the Budget as she reportedly faces a £22bn black hole left by the previous administration.
While cutting taxes can boost income for workers, there are concerns over the long-term economic effects of tax-cuts if they are not properly funded.