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Chancellor Rachel Reeves has increased the minimum wage by 4.1 per cent as part of a package to raise UK living standards, even as she prepares to unveil a massive tax-raising Budget that will hit “working people”.
Reeves’ crucial second Budget, to be announced on Wednesday, will fill a fiscal hole estimated at about £30bn with a series of major tax rises alongside some spending cuts.
She hopes the package will reassure financial markets that she has the public finances under control.
At the heart of the Budget will be a “stealth” increase in income tax — by extending a freeze in personal thresholds — that could raise up to £10bn a year. This figure is roughly equivalent to the extra money Reeves will have to find to fund higher welfare spending.
To soften a political backlash against the tax rises, Reeves will announce a series of measures intended to cushion the cost of living and to bear down on inflation, as she seeks to give the Bank of England space to cut interest rates further.
Reeves has confirmed an above inflation increase in the minimum wage, with an even bigger rise for younger workers, as she said she wanted the low-paid to be “properly rewarded”.
The chancellor said cost of living concerns justified a 4.1 per cent increase in the national living wage from next April, with an 8.5 per cent rise for workers aged 18 to 20, arguing “too many people are still struggling to make ends meet”.
While trade unions welcomed the move, it prompted fresh disquiet from business.
Kate Nicholls, chair of UKHospitality, a trade body, called the minimum wage increase “yet another cost for hospitality businesses to balance, at a time when they are already being taxed out”.
Reeves accepted recommendations from the Low Pay Commission, which said the main minimum wage rate for over-21s should go up to £12.71 per hour to remain at two-thirds of median earnings — a rise equivalent to £1,500 a year for a full time worker.
Andrew Griffith, shadow business secretary, said: “Businesses are warning that Labour are now pricing young people out of work altogether — destroying the very jobs they rely on.”
The chancellor will also use her Budget to confirm a freeze in prescription charges and some rail fares. A continuation of the “temporary” 5p cut in fuel duty is also expected.
Reeves’ expected decision to freeze income tax thresholds for a further two years will play a big role in filling the fiscal hole, even though in her last Budget she rejected the move because it would “hurt working people”.
Analysts estimate that extending the freeze introduced by the last Conservative government could raise close to £10bn a year, making it one of the centrepieces of her second Budget.
Reeves is also expected to announce an end to the two-child benefit cap, at a cost of about £3bn a year, which will delight Labour MPs, although opinion polls suggest it will be an unpopular move with the public.
The chancellor has already been forced to reverse plans to make almost £7bn of welfare savings — including to winter fuel payments — meaning that in total she will have to find about £10bn for extra spending on benefits.
Meanwhile, the government is to allow local mayors to impose a “tourism tax” on overnight stays in English cities, including London, in a move that has been criticised by hospitality executives.
The levy will apply to visitors at both hotels and Airbnb-style holiday rentals.
The rate of the tax, described by the government as a “modest charge”, has not been finalised. London mayor Sadiq Khan said the announcement was “great news for London”.
