Mansions, milkshakes and the minimum wage: Labour’s 2025 budget

0:00This is The Guardian.

0:08Today, a mansion tax and the end of the two-channeled welfare cap. Is this budget a return to Labour values?

0:23Rarely, if ever, has a budget had so much build-up. For weeks, the signals from the Treasury seemed clear. As economists predict, she will raise taxes in her budget. Obviously, we'll lay out our plans at the budget. For weeks, there's been speculation about what was going to be in it. The threat of a mansion tax on 150 ,000 homeowners who could be hit by Labour's proposed mansion tax. And what wasn't? The fresh chatter around a bank tax. Businesses watching, house buyers waiting, MPs and ministers bickering. And behind it all, a government that didn't seem to know itself. At one point flirting with the idea of raising income tax, breaking a manifesto commitment.

1:05We will all have to contribute to that effort. Each of us must do our bit. And then stepping back in the face of fierce opposition from their own backbenches. I think it is really important that we stick to our manifesto and that we keep the promises that we've made to the public. It all felt shambolic, disorganised, needlessly messy. That led to this bombshell report we had last night that income tax was being dropped. Markets did not like that. Very big drop when we opened this morning after we heard the news about change of policy and yet another U-turn. And then finally, finally, on Wednesday, Rachel Reeves opened her red box to try and put it all behind her.

1:46But did she do enough to convince voters that she and the government know what they're doing? From The Guardian, I'm Helen Pitt. Today in Focus. Everything you need to know about Rachel Reeves' second budget.

2:06Heather Stewart, welcome back to Today in Focus. Hi Helen. Thanks for making time for us on the busiest day of the year. It's your Christmas today, isn't it, as economics editor? It really is. So tell me, what was your instant reaction to the budget? Well, the instant reaction to the budget came a bit earlier than usual, to be honest, Helen, because we've had this extraordinary thing today where some, we think, poor soul at the Office for Budget Responsibility, which of course does all the maths behind the budget, accidentally published all of their documents mid-morning before the Chancellor had even stood up.

2:38Stole her thunder somewhat. Stole her thunder, just extraordinary. And in fact, when she did stand up, she sounded absolutely livid about it. This is deeply disappointing and a serious error on their part. A lot of the drama had been sort of taken out of her statement. So that made for a more dramatic morning than we would normally have because we were scrambling to read the documents about an hour before we would normally get hold of them. And how big do you think was the job facing Rachel Reeves when she stood up in Parliament in terms of the economic backdrop and the job that she had to do to convince not just the electorate but her own party that she knows what she's doing and that she's got a plan?

3:15It's a really, really difficult budget. So she did absolutely want to convince the electorate who, you know, the polling tells you she's a very unpopular chancellor in a very unpopular government. She needed to raise taxes, which is a very difficult thing, particularly when you've already done a big tax raising budget last year. She needed to reassure Labour-backed benches who are not happy about the state of the government and the lack of popularity about the government. And she also needed to speak to bond markets. The government is borrowing an awful lot of money. Very tiny changes in the confidence that the bond market has in the government's plans make a big difference to borrowing costs.

3:51So she was trying to address lots of different audiences. And she was coming back with a tax raising budget. She didn't really expect to give. You know, she did about 40 billion pounds in tax rises last year. Sort of hinted very heavily to us that it was one and done. This was not where she wanted to be. So I think it was very tough politically and very tough economically. Yeah, definitely. And so much of the chatter around this budget has been about how the government plans to raise money via taxes. Because as we've been told time and time again, there is this£20 billion black hole in the government's finances.

4:27But let's start by talking about spending. What are the big ticket items that Rachel Reeves is going to spend money on? So part of it is about some U-turns. So if you remember last year, she got rid of the winter fuel allowance for most pensioners. This did not go down well. including with her own backbenchers. That was reversed. And in the spring statement, she announced some welfare cuts. She was going to cut disability benefits. That went down even worse with her backbenchers. There was a huge rebellion and that policy had to be abandoned. So those two things together, that's sort of nine or 10 billion pounds worth.

5:04Another of the big things was new though, and she spoke very strongly about this, I thought, which was getting rid of the two-child limit, the limit on benefits for your third and subsequent children. Anti-poverty charities will tell you that is the way. Getting rid of that measure, which is sort of cruel and unfair, is the way to reduce child poverty. Reeves made that argument quite strongly. She devoted quite a passage of her speech to that. And there are many reasons why people choose to have children and then find themselves in difficult times. The death of a partner, separation, ill health, a lost job.

5:40I don't believe that children should have to bear the brunt of us. And, you know, also said the policy didn't work in its own terms. It was supposed to persuade people into jobs and stop people having more children and all of that. It doesn't even work in the terms that it was sort of set out by the Tory government. So that's£3 billion a year and Labour backbenchers cheered that change. So that's another increase in costs. Yeah, I thought it was really interesting how she made the moral case for this, because this budget has immediately been caricatured by the opposition as a budget for benefits streets, sort of playing into the idea that anybody who has children that they can't afford are just sort of feckless, that they don't know how to use contraception.

6:20Whereas Rachel Reeves said, you know, people face all kinds of unexpected circumstances in their life. And she also mentioned the rape clause. I will not tolerate the grotesque indignity of women of the rape clause any longer. This idea that women who conceive a third or fourth child by a rape have to prove it to the authorities. Unimaginably cruel, can you imagine? Or you can still have your benefits, but only if you can prove that this child was a result of a rape. I mean, she was absolutely right. It's appalling, terrible policy. It is cruel and I will remove it from the statute book. Yeah!

7:06So what else? So there was quite a lot of emphasis on the cost of living. So international sort of forecasters have been pointing out inflation is higher in the UK than it is in other major economies. And, you know, no doubt MPs are also pointing out their voters and noticing this. Yeah, we all feel it. You go to the supermarket every week, things seem more expensive. Absolutely right. That's not gone away. So there's quite a lot of emphasis on that. She's frozen rail fares, for example, for a year, prescription costs. And also they say they're going to bring down people's energy bills, perhaps by up to£150 a year.

7:38So they're hoping that, yes, people might notice some tax rises, but in the immediate future, they might notice that some of their bills will come down and that sort of helps. And this is part of Rachel Reeves's economic strategy, in fact, because she hopes lower inflation maybe opens the way for the Bank of England to cut interest rates again, probably next month, maybe also in the spring. And that helps to bring the government's borrowing costs down, everyone else's mortgage costs down and, you know, cheers everyone up generally. And what taxes has Rachel Reeves actually decided that she's going to raise?

8:10I think she's announced raises totalling almost£30 billion by the end of 2029. And she made a point, didn't she, of saying everybody has to kind of do their bit and make a contribution. Well, one of the most interesting things there is what they haven't announced, because we know that they flirted with the first increase in the main rate of income tax since 1975, since Dennis Healy was Chancellor, before our time, Helen. And they ditched that idea. That would have broken the letter of Labour's manifesto. They thought about it. They decided not to go there. And the biggest tax raiser is an extension of the freeze in income tax thresholds.

8:47So these are the income thresholds where you go over the line from paying no income tax into paying income tax, from paying the basic rate into paying the higher rate and from paying the higher rate into paying the additional rate. And this was a lever that Rishi Sunak pulled, Jeremy Hunt pulled it, and she's extended it again by another three years. So that takes you beyond the next general election. And that's a big one, isn't it? It is sneaky because rather than increasing the rate of income tax, so how much you pay out of every pound, what happens is those thresholds usually increase in line every year in terms of inflation.

9:21But if you freeze those thresholds, you get a pay rise and it drags more and more people and a larger and larger proportion of the workforce into paying basic rate when they previously wouldn't have done, including pensioners, in fact, and into paying the higher rate when they would previously have paid the basic rate. Yeah. And I think that the early calculations are that about a million people who don't currently earn enough to pay any income tax at all will be drawn into paying tax as soon as their earnings inch above the lowest bracket, which is about£12 ,500. And then others, of course, will be pushed into higher brackets.

9:55So we'll be paying more tax. And all of this, Reeves says, will raise£8 billion. What other taxes is she increasing? So what she said was everyone's going to have to make a contribution to rebuild the economy, to rebuild public services. But I'm going to minimise the contribution that most people have to make. Because I will make further reforms to our tax system today to make it fairer and to ensure that the wealthiest contribute the most. So there were a range of things aimed at making sure that wealthy people or higher earners pay more. So one of the big headline grabbers there was a sort of mansion tax, inverted commas.

10:35So they will revalue all of the homes in the top bands, bands F, G and H. and if your house is worth more than two million quid you will have to pay an extra charge and there's three bands of that I think it's the highest you might have to pay an extra seven thousand pounds a year I think if your home's worth more than five million pounds so I suspect most of our listeners will be all right but um that's the sort of um I mean it's a partial approach really because as you'll know council tax is based on housing valuations that were made in 1991. So it's completely crazy. And they're doing a sort of partial revaluation.

11:14And I suspect some of the think tanks may say, oh, for goodness sake, you know, if you're going to do that, why not grasp the nettle? But it's a notoriously difficult thing to do. And maybe once you've sort of crossed the line and established the principle, you could put those rates up, you could do a wider revaluation. Does it raise so much money? No, it's about 400 million. Well, 400 million pounds a year is not nothing, but it's not huge compared to the across the board. So you could maybe say it's performative. It's allowing them to say, look, we're going after the millionaires, albeit property millionaires.

11:45And what about changes to pensions? Yes. So there's a particular kind of scheme called a salary sacrifice pension, where you accept a lower salary in exchange for higher pension contributions, and then your employer doesn't pay national insurance on those. She seems to think this has become a bit of a tax dodge and as much she was sort of saying it was supposed to be for particular circumstances but it's become much bigger than that and that it overwhelmingly benefits higher paid people so she's now capping the contributions that you can make free of national insurance to two thousand pounds a year yeah which is a massive decrease right at the moment i think you can put tens of thousands of pounds in there if you want absolutely yeah okay okay so we've got the stealth raid by freezing the threshold we've got this mansion tax what other tax raises are there So she's going to raise income tax for savings above a threshold and for property income.

12:39So she made a point of saying... Currently, a landlord with an income of£25 ,000 will pay nearly£1 ,200 less in tax than their tenants with the same salary. So that's quite interesting because that is income tax, but it's not the main rate of income tax. And it's this idea which she talked about of unearned income, so income from assets, tends to be taxed more generously than earned income, than wages. And she wants to sort of level that out a bit because it's not fair. So that's to be welcomed. I think that's progressive, but no doubt will cause some alarm among landlords, for example.

13:22I think the UK's tax take is heading to a record high in six years time according to the Office for Budget Responsibility as a result of what Rachel Reeves has announced there's a whole smorgasbord really of other tax raises just rattle us through the other things that she's doing yet so there were loads of little things actually before I came up I actually printed out the list of budget measures. You know, I've printed out five pages and I've not got to the end of it, 50 measures so far. But there were lots of little bits and pieces. So the sugar tax that was introduced by the Conservative government is being extended to milk-based products.

13:53You're going to have to pay more for your milkshake, Helen, I'm afraid. Oh, right. Not just a full fat Coke. No, exactly. She is also giving mayors the right to raise a tourist tax, which is something that Andy Burnham and Sadiq Khan and others have called for for a long time. It's a way of, of raising a little bit more for people who come and stay in your area and you can reinvest it in improving the area. She's also changing the way that electric vehicles are taxed. So the OBR has said it's a real worry that the revenue from fuel duty is going to fall and fall and fall because we're all switching over to electric cars.

14:28Petrol duty is going to bring in less and less and less. And the OBR has said this is a real worry. So the government's done two things. One is if you've got an electric vehicle, you're now going to have to pay a per mile tax. And they are also, this is a long delayed thing, but the increase in fuel duty in line with inflation has been delayed and delayed and delayed. She hasn't implemented it immediately, but she has said that it will start coming in from September next year and it will be stepped up from there. And what about the so-called sin taxes? I've heard them referred to before. I will also reform gambling taxes in response to the rise in online gambling.

15:06booze, fags. So Gordon Brown has been campaigning for quite a while now for higher tax on offshore gambling to help to fund the lifting the two-child limit. And she's gone ahead with that in quite a tough way, I think. So not on gambling in person, so not on, you know, if you're a fan of the races, Helen, you'll be all right. But this sort of online gambling, which I think the argument is it's sort of undertaxed. So she's going to go ahead with that and was quite blunt about the fact she thought that was a perfectly good way of raising money. There's a long running argument. Our colleague Rob Davies has done loads of great reporting on this, on the harm that is caused by gambling addiction and so on.

15:46So that's one to be welcomed, I think. The Labour Party has made such a big thing about being on the side of working people. Do you think that they can still claim that now after this budget? It's a difficult question. I mean, they would absolutely say, they would make this argument, everyone's got to pay their part. We can't avoid everyone having to play their part. And we've tried to help the lower paid with the fuel bills, staff with benefits changes and so on with a minimum wage. I think they could point to a fair package of things that will help people. But they can't say we're not increasing taxes on working people because that's not true.

16:20Yeah. And just last year, Rachel Reeves, when she delivered her first budget, said that she wasn't going to extend the freeze on income tax thresholds because it would, quote, hurt working people. Absolutely. And she came very close, I thought, to saying that had she done that, it would have been a breach of the manifesto. So there's a real danger, I think, of semantics here. I think it would be much better for her to say straight on, look, maybe this does breach the spirit of the manifesto. I didn't want to do it, but it's very difficult to transform the NHS in the way that we want to and fix the potholes and, you know, make the economy grow again without all of us playing our part.

16:54I think that's a much stronger argument than sort of semantics about whether you've broken the letter of the promise or not. Because I think once you're explaining in those sorts of terms, you're losing, aren't you? Particularly in an environment where political trust is very, very low. Yeah, definitely. And there's been a lot of grumbling from business about the double whammy of the employer's national insurance rise last year and the continued increase of the minimum wage, which Rachel Reeves confirmed. At the budget last year, I increased the national minimum wage and the national living wage.

17:27And I am doing the same this year too. How do you think businesses are going to receive this budget? So in some ways there will be a bit of relief because there were worries that she would come for businesses again in the way that she did last year. that she would see them as a sort of easier target than working people and that we would see more business tax rises, which we didn't really. And there were some measures that she clearly hopes will improve life for certain groups. So she sort of talked about changing the business rates regime a bit so that it helps smaller high street retailers at the expense of vast warehouses.

18:06And so she was clearly trying to give a sort of more of a pro-business front, But they will still complain about the minimum wage, particularly about the minimum wage for younger people, which Labour said in its manifesto, it would equalise the minimum wage for 18 to 21 year olds with the rest of the population. So we've had some really chunky rises there. And increasing the minimum wage for 18 to 20 year olds from£10 to£10.85 an hour. And increasing the living wage from£12.21 to£12.71 an hour. So the Resolution Foundation think tank, for example, said yesterday when the minimum wage rise was announced that that risks pricing younger people out of the labour market.

18:49Because why would you? Well, they can't win, can they? I know. I know. Exactly. Exactly. I mean, the flip side of that is, you know, why should a 19 year old be treated less well than a 22 year old? Yeah, for doing the same job. Absolutely right. But there will be some of those arguments still, I think, about the cost of hiring and so on. Coming up, has Rachel Reeves done enough to silence her critics?

19:21And what did you make of the political positioning of the budget? Because I thought it was quite interesting to listen to who she had a pop at. She had a pop at Zach Polanski, the fairly new leader of the Green Party, didn't she? Now, I know that the leader of the Green Party is a keen hypnotherapist and he believes that he can achieve remarkable things using only the power of his mind. Some slightly off-colour reference to his former past as a hypnotist where he suggested that he could make women's breasts grow with the power of his mind. I'm glad you've done that explanation, Helen, and not...

20:02Unfortunately, the only things getting bigger under his approach would be the deficit and the rate of inflation. One pop at Nigel Farage where she talks about freezing Russian assets. We are ramping up sanctions on Russia and we are freezing known Russian assets. Yeah, and I don't mean a member for Clacton, she said. I don't actually mean the honourable member for Clacton. Boom, boom. There's absolutely loads of anti-Tory stuff. They are clear that this is not about the last 14 months. It is about the previous 14 years. The legacy of Brexit and the pandemic and the damaging decisions by the party opposites.

20:46I was kind of thinking, God, I feel like the electorate has accepted that the Tories made a mess of things. They're so low in the polls. What did you think about the politics of it all? so sometimes one of the things that chancellors do in budgets is they try out the shape of the argument or they lay the groundwork for the shape of the argument at the next general election because that's part of what's in the back of their mind when they're making the policies right and I think she thinks at the next election it's going to be investment versus cuts it's going to be we are fixing the roads and we're sorting out your high streets and we are bringing down NHS waiting lists and the hypnotist man over there can't be trusted and you know the Tories and reform would just do cuts I'm investing those guys would do a load of cuts and so I think it was sort of part of trying that out you also have to remember it's a piece of parliamentary theatre and one of the audiences she and Keir Starmer are really keen to win over is those backbenchers who will determine Keir Starmer's future and Labour backbenchers love a bit of that sort of you know let's stick it to the guys on the other side.

21:48But she was quite punchy. The Tories under Liz Truss crashed the economy and sent mortgage rates spiralling. She was sort of almost heckling the hecklers back. They've been so loud, Madam Deputy Speaker, and yet I can't even hear them now. So it was quite a sort of rowdy business. And Rachel Reeves has been under an immense amount of pressure ever since she got the job, really. And many people listening all remember her crying in the Commons just a few months ago, looking utterly bereft. Awful, yeah, terrible. Do you think she's done enough to turn the ship around, to make her backbenchers, to make the voters think she knows what she's doing?

22:29I think she made as good a fist of it as she could have done, given where we are, given all the missteps and the U-turns and the mess and the pre-briefing and the kite flying and the everything else. you know if you'd sort of blocked all of that out and not you know experienced any of the sort of chaos and the noise and you just watched her you'd have thought that is a strong Labour budget it's got a sort of moral argument that at its heart and you know the burden is falling most heavily on the highest paid and the wealthy it doesn't completely protect the poorest but it there was an argument about everyone doing their bit and backbenchers seem to absolutely love it but you know it always takes a while to assess a budget and you know it depends on the market reaction it depends on business reaction it depends on whether the think tanks start to discover funnies when they go through the detail and you know worries about what adds up what like you're talking about sort of pasty tax scenarios yeah absolutely and as I say there were so many measures here that it's possible that there will be something that somebody will say is unworkable and you you know it will make people furious and whatever.

23:35So it felt to me like in the moment, in the theatre of the House of Commons and looking at the numbers, yeah, it seemed to me it added up and there was a coherent argument. But the backdrop is very, very tough. And I don't spend all of my time talking to Labour MPs, but none of us know how much time Keir Starmer and Rachel Reeves have, right? And do the benefits of the budget in terms of the economy, in terms of confidence and all of those things. You know, that's maybe a slower burn than Labour MPs' patience. Heather Stewart, thank you very much. Thanks, Helen. That was Heather Stewart, The Guardian's economics editor.

24:11You can read all of her analysis of the budget at theguardian.com. And that is all for today. This episode was produced by Ivor Manley, Ruth Abrahams and Priya Baradia and was presented by me, Helen Pidd. Sound design was by Rudy Zagadlow and the executive producer was Sammy Kent. We'll be back tomorrow.