Budget 2025: Reeves Big Gamble

Next week, we will finally see the Chancellor deliver her 2025 Budget. Months of speculation, U-turns, pitch rolling and leaks have brought us to this moment. Never before have we seen a Chancellor have to work so hard to sell a Budget that hasn’t yet even been delivered. So what will next Wednesday bring? Is it likely to be as bad as thought? Will the Prime Minister and his Chancellor survive the political fallout? WFW is here to walk you through the rumour mill and set out what could come next.

The backdrop to this Budget is a roughly £20 billion “black hole” that the Chancellor needs to fill to meet her own fiscal rules, pressure from backbenchers to cut the two-child limit and Labour’s manifesto pledge not to raise taxes on working people. After months of speculation and heavy handed public pitchrolling from the Chancellor herself, it appears the Government will technically keep its promise not to raise the rates of income tax. Instead, she’ll raise more money from income tax by extending yet again the freeze on thresholds - dragging ever more people into the higher 40% rate - alongside increases to several smaller taxes.

Secondly, it looks likely the Chancellor is going to significantly squeeze salary sacrifice schemes - a method by which people can give up a chunk of salary in return for their employer putting it straight into their pension. This saves both the worker and the employer national insurance payments and, for higher earners, means there is no need to claim higher rate pension tax relief. This would appear to be a tax rise in all but name but could potentially give the Chancellor the political cover she desperately needs.

If the hole from the final economic forecast sent to Reeves today is bigger than expected, keep an eye on the threshold for higher earner national insurance. The upper earnings limit is currently around £50,000 a year, beyond which NICs are 2%. Lifting this threshold would expose bigger chunks of income to the main 8% rate - raising money again without hiking the rates of key taxes.

On the property, it has been reported we could see the introduction of a “mansion tax” - potentially a new super council tax on homes worth more than £1.5 million. This would likely be popular with Labour MPs and voters outside of London as it is highly likely this would impact London and the South East more than anywhere else. But in the run up to May’s elections, where all London Boroughs are up, this strategy is not without its risks. Some other taxes being floated by the Treasury have been the “Taxi Tax” - adding VAT at 20% to private hire cab journeys like Uber or Freenow - a new gambling tax on slot machines and pay-per-mile driving taxes on electric cars, which pay much less vehicle excise duty and no petrol duty today. We also know that after the last Budget, which squeezed businesses, there are unlikely to be any new pressures on private companies as the Government will be desperate to drive growth across the country.

As well as rises, the Chancellor is going to have to tighten the spending for most Government departments. The NHS and the Ministry of Defence are unlikely to see any cuts, but we could see spending restrictions coming in across other departments to help close the spending gap.

No Budget would be complete without a rabbit out of the hat, a gift to voters and to the backbenchers to sweeten the deal. So what could the Chancellor do this year? With huge pressure on Government to lower energy bills, it is widely reported that the Chancellor will take action to cut bills, with cutting the 5 per cent VAT rate on domestic energy one of the options being considered. The effectiveness of such a move in terms of savings in the pocket is questionable, given persistent inflationary pressures and the fact that people’s energy bills are rising going into the winter anyway, but it would offer a visible headline. In another sweetener, the Treasury announced this morning that prescription charges would be held at £9.90.

Now we don’t know for sure what will be in the Budget until the Chancellor reads it out at 12:30 on Wednesday. But what we do know is that we have never before seen so much briefing, pitch rolling and public speeches to try and sell a Budget that doesn’t yet exist. It is no understatement to say if this Budget goes down badly with the public, Reeves and Starmer will be under significant pressure from the public, the Opposition and their own backbenchers. This has the potential to be Reeve’s last Budget if she is unable to sell tax rises as in keeping with the manifesto.

With the markets already on edge, the Government obsessively watching the gilt market and Labour polling miles behind Reform, this is one of the most politically consequential Budgets we have seen in recent times. And it won’t be over when the Chancellor sits down on Wednesday. That is when the really hard work of selling it to the public and her own party will begin.