UK tax hikes to placate bond markets likely to be costly for Reeves

By Kate Holton and Elizabeth Piper

LONDON (Reuters) -Rachel Reeves may have placated the bond market with her budget on Wednesday but higher taxes for Britons on everything from milkshakes to electrical vehicles are unlikely to lift the gloom around the country, or her party, any time soon. 

British finance minister Reeves announced more than 26 billion pounds ($34 billion) in tax rises, on top of the 40 billion pounds she raised last year, prompting the official budget forecaster to warn of a large hit to growth in living standards.

The chaotic run-up to the budget, with Britain's fiscal watchdog accidentally posting all the main details online before Reeves had even spoken, also did little to convince Labour's lawmakers that their struggling government could get its act together. 

Reeves' Labour Party was elected in a landslide in 2024 but now routinely polls below 20%, with questions growing as to whether Prime Minister Keir Starmer can remain in power beyond what are expected to be difficult local elections next May.

"This budget was all about regaining confidence of both the market and Labour members of parliament, and it is doing the minimum to achieve that," Guillermo Felices, global investment strategist for fixed income at PGIM, said.   

REEVES HAD LITTLE TO OFFER TO HER CENTRE-LEFT LAWMAKERS    

Hemmed in by the need to raise taxes to tackle the public finances, Reeves had few give-aways for her restive lawmakers, opting instead to make small measures to try and lower the cost of living.          

She cut energy bills by moving some policy costs to general taxation and removed a cap that had prevented low-income families from receiving further benefits when they have a third child or subsequent children.

That welfare change was loudly cheered by the centre-left Labour politicians in parliament, but according to polls it is unpopular with many Britons.

Christina, a 64-year old charity worker who did not give her surname, said although she appreciated the economy was tough for bigger families, she disagreed with the removal of the cap. 

"You can't just expect more money from benefits," she told Reuters, walking over London Bridge shortly after the budget. 

Labour was supposed to bring stability to British politics following years of chaos, forming a government with a big enough mandate to take tough and long-term decisions to fund the rebuilding of the country. 

But the centre-left party has failed to rein in spending - forced to abolish plans to cut the welfare budget in the face of a backbench rebellion - while economic growth has remained muted and borrowing costs inflated.  

Reeves is now the most unpopular finance minister since records began, according to pollster IPSOS, and she was knocked off her stride on Wednesday by the early release of the key forecasts. 

One Labour lawmaker said while the OBR's error was not Reeves' fault, it followed weeks of chaos in the run up to the budget which were dominated by leaks and tax U-turns that unnerved the markets. 

"It adds to everything about the narrative," the Labour lawmaker said.

TREASURY U-TURNED ON PLANS AHEAD OF THE BUDGET 

In early November, Reeves had appeared to be laying the ground for an income tax rate hike, the first such hike in 50 years and a move that would have broken the party's main election pledge not to raise one of the main taxes.

Briefing less than two weeks ago that that was now not needed came as a major surprise to markets. 

But the decision not to hike income tax rates, while broadly welcomed by lawmakers, means Reeves instead had to drag more workers into the income tax net, scale back the generosity of pensions incentives and increase multiple other taxes ranging from share dividends to milkshakes and lattes, online bets, expensive houses and electric vehicles. 

That not only gives the impression that Reeves is hunting for revenue wherever she can find it, but it will also likely hamper efforts to grow the economy.

That had been Reeves' main ambition when she was installed last year, but on Wednesday the fiscal watchdog cut its economic growth forecasts.    

($1 = 0.7557 pounds)

(Writing by Kate Holton; additional reporting by Andy Bruce; Editing by Toby Chopra)