Reeves warns of ‘tough decisions’ in budget but pledges ‘no austerity’

The chancellor has promised the UK will not return to austerity but asked Britons to be prepared for tough decisions in her autumn statement, following the prime minister’s warnings that it would be a “painful budget”.

Rachel Reeves insisted she was optimistic about the UK’s economic future as she attempted to persuade critics that there would be no return to austerity under Labour.

“Next month I will deliver the first budget of this Labour government. And because I know how much damage has been done in those 14 years, let me say one thing straight up. There will be no return to austerity,” the chancellor told the Labour party conference in Liverpool.

“Yes, we must deal with the Tory legacy and that means tough decisions but I won’t let that dim our ambition for Britain.”

As for the winter fuel payment decision, she acknowledges not everyone will agree but insists she "will not duck" those decisions.

Prime minister Keir Starmer had already warned that October's budget will be "painful" and the government will have to make "big asks" of the public.

Read more: FTSE 100 LIVE: Markets hover as Reeves pledges no return to austerity

With heavy criticism of the Tories but very few announcements of what the autumn statement will actually deliver, here’s what you can expect on 30 October.

Winter fuel cuts

One of the very few "tough" measures Reeves actually mentioned in her keynote Labour conference speech, she doubled down on her winter fuel raid.

"I know that not everyone in this hall or in the country will agree with every decision that I make. But I will not duck those decisions, not for political expediency, not for personal advantage… I did not take those decisions lightly, I will never take the responsibility of this office lightly," she said.

But she argued, given the £22bn black hole, and the fact the triple lock will lead to the state pension rising by an estimated £1,700 over the course of this parliament, cutting the winter fuel payment is “the right decision in the circumstances that we inherited”.

Covid corruption commissioner

Officially a new measure, although it had been leaked to the press overnight, Reeves announced that the government is appointing a Covid corruption commissioner to recover money lost on dodgy PPE contracts.

"I won't run a blind eye to rip-off artists and fraudsters, who used a national emergency to line their own pockets. I won't let them get away with it," she said.

The commissioner will investigate the “carnival of waste and fraud” that took place during the pandemic under the Conservative government. There are currently £674m worth of contracts in dispute.

Private schools VAT

Reeves has defended her plan to increase VAT on private schools, hailing the decision as part of the “Britain I believe in”.

Read more: 10 finance decisions you should avoid before the autumn budget

The chancellor said her party’s private school VAT initiative “is the fair choice, the responsible choice, the Labour choice to support the 94% of our children in our state schools".

Still on the topic of education, Reeves confirmed the Labour pledge to introduce free breakfast clubs in every primary school in England.

The initiative will start in "hundreds of schools" in April ahead of being rolled out nationally, she said.

The chancellor described it as an investment in young people — and says the move will help to tackle the issue of child poverty.

Capital gains tax

Investors waiting on a glimpse of what to expect from Labour when it comes to markets and investment are probably disappointed as the speech revealed close to nothing around the future of capital gains tax (CGT) in the UK.

However, is it widely predicted that there will be changes to CGT come October.

Capital gains is imposed on the profit from the sale of capital assets, including second homes, shares, business assets and most personal possessions worth £6,000 or more, apart from cars.

Read more: Pensions and capital gains tax in line for budget tax rises, says IFS

Currently, people do not have to pay tax on the first £3,000 of profits, or £1,500 for trusts.

The minimum limit could be removed and the tax could be imposed on assets currently exempt.

Inheritance tax

Another key expectation was if Reeves would lift the veil on what Treasury is planning to do around inheritance tax (IHT). Again, no luck.

But just like CGT, inheritance tax is emerging as one of the most likely areas for reform in the government’s drive to raise revenue. Currently, inheritance tax (IHT) is levied at 40% on estates valued above £325,000 upon death, but both the rate and the threshold could soon face changes as ministers explore options to address fiscal pressures.

Proposals under consideration include increasing the tax rate or lowering the threshold at which estates become liable. The aim would be to bolster government coffers, potentially affecting a broader section of the population.

At present, several exemptions apply, notably for agricultural land and family-owned businesses. These exemptions could be revised, with a possibility of reducing or eliminating them to expand the tax base. Another key area of focus is the timeline for asset transfers made before death. Currently, individuals can give away assets up to seven years prior to their death without triggering IHT, but this window may be shortened as part of wider reforms.

In March, a leaked recording revealed Darren Jones, now chief secretary to the Treasury, discussing the potential of IHT as a tool to "redistribute wealth" and address "intergenerational inequality." Such comments hint at a broader ambition within the government to reshape the tax as a means of tackling wealth disparities between generations.

Business rates

Labour is reportedly consulting on significant changes to business rates, a levy currently imposed on most non-domestic properties. The party is exploring reforms that would base rates on the value of the land rather than the current rateable value system, which estimates how much it would cost to rent a property for a year, as of April 2021.

The current regime offers relief to certain sectors, including small businesses, as well as properties in retail, hospitality, and leisure. A shift to a land value-based system could have wide-ranging implications for business owners, particularly in high-value urban areas, where land values often far exceed rental estimates.

Despite speculation about inheritance tax reform, Reeves notably omitted any reference to it in her keynote speech.

Other taxes

Labour reaffirmed its commitment to maintaining tax stability for working people, promising not to raise income tax rates or key levies such as national insurance or VAT. Reeves pledged to freeze basic, higher, and additional rates of income tax, while also capping corporation tax at its current level for the remainder of the next parliament.

Read more: What we're expecting to see in the autumn budget

“We said we would not increase taxes on working people, which is why we will not increase basic, higher or additional rates of income tax, national insurance, or VAT,” Reeves told delegates.

In a bid to tackle energy costs and boost domestic energy production, Labour also plans to extend the energy profits levy on oil and gas producers. This move aims to redirect investment into homegrown energy sources, bolstering the UK’s energy independence.

Reeves also targeted the tax system's fairness, promising to close the non-domiciled tax loophole and intensify efforts against tax avoidance and evasion. “We will end the non-dom tax loopholes, and we will crack down on tax avoidance and tax evasion. That is the difference our Labour government will make,” she said.

'Era of trickle-down, trickle-out is over'

Reeves has said “wealth created and wealth shared in every part of Britain” would be the “prize” of the Labour government’s industrial strategy.

As she closed her speech at the Labour party conference, the chancellor said the “era of trickle-down, trickle-out dogma is over”.

Businesses appear to be optimistic, with Shevaun Haviland, director general of the British Chambers of Commerce (BCC), saying it was encouraging to hear the chancellor highlight the importance of economic growth, increased exports and investment.

Read more: How to prepare for possible pension changes in the budget

“Businesses will be keen to get more detail on how she plans to do this. They will want to know where any increases in the tax burden are likely to fall, but they will welcome the imminent publication of an Industrial Strategy.

“The BCC believes there are three main ingredients needed to make the budget a welcome one for business. It must encourage investment, strengthen the workforce and develop our local economies.

“All eyes will now be turning to 30 October to see if the chancellor can deliver on the intent that she has set out today," she said.

Harry Quilter-Pinner, interim executive director of think tank The Institute for Public Policy Research (IPPR), said tax increases should target the wealthiest.

“Faced with a dire economic inheritance and tough economic choices still ahead, we welcome the chancellor’s promise not to return to austerity — and her call for the investment we will need to deliver a brighter economic future.

“Now we need a hard look at the current fiscal rules that the government is operating with, and the scope for more tax on those with the broadest shoulders, to ensure she can keep those promises. We also need reform of the public sector to deliver better and sustainable public services for the long term," he said.

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