By Muvija M and William Schomberg
LONDON (Reuters) -British finance minister Rachel Reeves fought back on Thursday against criticism that she was raising the tax burden to a post-World War Two high to fund extra welfare spending and returning the Labour Party to its high-tax, high-spend past.
A day after announcing plans to raise taxes by 26 billion pounds ($34 billion) on top of 40 billion pounds in her first budget last year, Reeves faced questions about her decision to end restrictions on child benefits for low-income families with more than two children.
The change is supported by most Labour lawmakers but finds more limited support among voters, according to opinion polls.
“I don’t think children should be punished by this pernicious policy any longer, and the cost to society of this is huge,” Reeves told LBC Radio.
The Resolution Foundation think tank said the “double-whammy” of Reeves’ budget measures in 2024 and 2025 represented the biggest back-to-back tax increases by a newly elected government on record.
OPPOSITION ATTACKS TAX RISES TO FUND WELFARE
The higher welfare spending was attacked by the opposition Conservative Party which accused Reeves of taking money from workers to appease her party’s restive lawmakers, opening up fresh political dividing lines.
Reeves hit back, saying 60% of families that will benefit had at least one parent in work but could not afford the basics.
Her policy change presents a challenge to Reform UK, Nigel Farage’s populist party which has held a commanding lead in the opinion polls for months and backed the lifting of the two-child cap.
Many of the British newspapers attacked the move, with the Metro newspaper popular with commuters saying “You’re Paying!”.
Reeves denied the charge, pointing instead to a downgrade in Britain’s productivity outlook by the country’s budget watchdog – based on years of past underperformance – for the range of tax hikes she announced on Wednesday.
“I have to operate within the forecasts that I’m presented with,” Reeves told the BBC. “Of course I could have made different decisions, but I believe those are the right decisions.”
The government estimated that scrapping the two-child benefit cap would eventually take 450,000 children out of poverty at a cost of 3 billion pounds a year.
REEVES MAKES HISTORY WITH SCALE OF TAX HIKES
The Office for Budget Responsibility, which assesses government fiscal plans, said annual welfare spending was expected to be higher by 16 billion pounds at the end of the decade than it would have been under Reeves’ previous plans.
That included the 7 billion pound cost of a government U-turn in July when a rebellion among Labour lawmakers forced Prime Minister Keir Starmer to drop plans to make it harder for people with health conditions to claim a benefit.
The OBR downgrade to productivity forecasts lowered projected tax revenues by 16 billion pounds but this was partly offset by a forecast 10 billion pound tax boost from faster wage growth and related forecast changes.
Analysts who pored over the budget overnight highlighted how much of the higher public spending will kick in quickly while the bulk of the tax increases will come in later years.
That raised questions about the willingness of Starmer and his government to stick to the tax hikes ahead of an election due in 2029.
“It was a borrow-to-spend budget in the short term, and a combination of a tax-and-spend and tax-and-bank-it budget in the medium term,” said Helen Miller, director of the Institute for Fiscal Studies, a think-tank.
The OBR said on Wednesday that Reeves now has a buffer of 22 billion pounds for meeting her fiscal targets at the end of the decade, more than double her previous amount.
Asked about a reduction in growth forecasts for the coming years, Reeves said she intended to take further measures to speed up the economy and the projections did not factor in new trade deals and plans to boost infrastructure investment.
“There’s plenty more that I’m going to do to grow our economy and make working people better off,” she told Times Radio.
As well as the higher welfare spending, Reeves’ budget plan sought to reassure bond investors that she can meet her borrowing targets.
Long-term British government borrowing costs in financial markets rose on Thursday, but reversed only part of their sharp fall on Wednesday.
The yield on 30-year gilts was up by about 2 basis points at around 5.23% at 1205 GMT having dropped by 12 basis points after the budget announcement.
($1 = 0.7560 pounds)
(Writing by William Schomberg and Catarina Demony; Editing by Kate Holton and Emelia Sithole-Matarise)
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