Analyzing Rachel Reeves’ Economic Forecast: Key Figures and Benchmarks

In a recent speech, Rachel Reeves highlighted significant economic forecasts from the Office for Budget Responsibility (OBR) that paint a complex picture of the UK’s financial landscape. These figures reveal a trajectory of rising tax burdens, sustained government spending, and strategic investments that will shape the nation’s economy for years to come. This article delves into the key figures and benchmarks presented in her speech, providing insights into their implications for the UK economy.

Rising Tax Burden: A Historical Perspective

One of the most striking forecasts is the anticipated increase in the overall tax burden in the UK. The OBR projects that this burden will rise from 36.4% of GDP in 2024/25 to 38.3% by 2027/28. This figure represents the highest tax burden since records began in 1948. The previous Budget in March 2024 had estimated a lower peak of 37.0%, indicating that recent policy announcements have significantly influenced this upward revision.

The projected tax burden of 38.3% in 2027/28 is not only a record high but also more than five percentage points above the pre-pandemic level of 33.1% in 2019/20. This increase is primarily driven by personal taxes, including adjustments to employer national insurance rates, as well as capital taxes, which reflect anticipated rises in property and equity prices. Such a substantial rise in the tax burden raises questions about the sustainability of this trajectory and its potential impact on households and businesses alike.

Sustained Government Spending: A New Normal

The size of the UK state, measured by total government spending, is forecast to remain between 44% and 45% of GDP until the end of the decade. This level of spending is almost five percentage points higher than before the COVID-19 pandemic and marks the longest sustained period of such spending since World War II. The forecast indicates that spending will not dip below 44% of GDP for a decade, from 2020/21 to at least 2029/30.

This prolonged period of elevated spending surpasses previous post-war periods, including the three years from 1974/75 to 1976/77 and the four years from 2009/10 to 2012/13. The implications of sustained high government spending could be profound, influencing everything from public services to infrastructure investment and economic growth.

Government Investment: A Commitment to Growth

In a positive turn, government investment is projected to remain above 2% of GDP for the remainder of the decade, marking the highest sustained level since the 1970s. Public sector net investment is forecasted to be 2.6% of GDP in 2023/24, maintaining this level in 2024/25 and gradually increasing to 2.7% in 2025/26 and 2026/27, before slightly declining to 2.4% by 2029/30.

This trend of sustained investment is noteworthy, as it represents seven consecutive years above the 2% threshold—a feat not achieved in over 40 years. Historically, government investment was above 2% from 1948 until 1980/81, but it has largely remained below this level since, with only a few exceptions. This renewed commitment to investment could signal a strategic shift towards fostering economic growth and addressing long-term challenges.

National Insurance: A Record High

The government’s decision to raise the main employer contribution rate of national insurance from 13.8% to 15.0% starting in April 2025 will set a new record for this rate. This increase, coupled with a lower threshold for contributions, is expected to generate an additional £25.7 billion by 2029/30, according to the OBR.

While the previous Conservative government briefly raised the rate to 15.05% in April 2022, it was quickly reverted back to 13.8%. The forthcoming increase represents a significant policy shift, with potential implications for businesses and employment costs across the UK.

Corporation Tax: A Steady Commitment

The government has committed to maintaining the main rate of corporation tax at 25% for companies with profits exceeding £250,000 throughout the current parliamentary term. This decision is projected to generate revenue equivalent to around 3.5% of GDP from 2024/25 onwards, marking the highest level of corporation tax since its introduction in 1965.

This commitment to a higher corporation tax rate reflects a broader strategy to ensure that businesses contribute fairly to the public finances, particularly in light of the increased spending and investment commitments outlined in the forecasts.

Conclusion: Navigating a Complex Economic Landscape

Rachel Reeves’ speech, underpinned by the OBR’s forecasts, presents a multifaceted view of the UK’s economic future. With a rising tax burden, sustained government spending, and strategic investments, the government is navigating a complex landscape shaped by both immediate challenges and long-term goals. As these policies unfold, their impact on households, businesses, and the broader economy will be closely watched, with the potential to redefine the UK’s economic trajectory for years to come.