By David Milliken and Sachin Ravikumar

LONDON (Reuters) – Britain’s new finance minister Rachel Reeves announced the biggest tax increases in three decades in her first budget on Wednesday, accusing the former Conservative government of breaking the country’s public services.

Businesses and the wealthy were set to bear the brunt of the tax hikes and Reeves also paved the way for higher borrowing for investment to speed up Britain’s economy, which has been slowed by the 2007-09 global financial crisis, Brexit, COVID and soaring energy prices.

The former Bank of England economist – who said she was proud to be the first female Chancellor of the Exchequer – stressed there would be no repeat of how former Conservative Prime Minister Liz Truss sent the bond market into a tailspin in 2022 with her unfunded tax cut plans.

Initial reaction to her speech suggested investors were unfazed by the Labour Party’s first economic programme.

But government prices fell later as the scale of the planned spending became apparent and investors scaled back their bets on Bank of England interest rate cuts next year.

Reeves said she would raise taxes by 40 billion pounds ($52 billion) a year, blaming the Conservatives for leaving her Labour Party with a budget “black hole”.

“Any responsible Chancellor would take action,” she said. “That is why today, I am restoring stability to our public finances and rebuilding our public services.”

She painted a grim picture of Britain, with record waiting times in the health service, children studying in crumbling schools and dysfunctional transport and justice systems.

But in a setback for the new government, a budget watchdog said the economy was expected to grow by less than previously forecast between 2026 and 2028 after outperforming only slightly in 2024 and 2025.

Showing the scale of the new tax increases on top of those of the previous government, the watchdog also said Reeves’ plans would take the government’s tax take to a historic high of 38.2% of economic output by the end of the decade. That is still lower than in many other European economies but is up from 36.4% now and more than 5 points higher than before the pandemic.

According to the Institute for Fiscal Studies think-tank, tax hikes of 40 billion pounds would be equivalent to 1.25% of economic output, surpassed in recent history only in 1993 by a budget plan under the Conservatives.

Prime Minister Keir Starmer had warned “those with the broadest shoulders” would have to pay more to spare “working people.”

The yield on 10-year British government bonds – which moves in the opposite direction to prices – was up by around four basis points on the day at 1600 GMT, having fallen sharply during Reeves’ speech earlier.

Investors were pricing in fewer interest rate cuts by the BoE given the scale of government spending with four quarter-point reductions expected in 2025 compared with about five earlier in the day.

TAXES UP FOR BUSINESSES AND THE WEALTHY

Reeves announced a string of tax increases, saying “difficult decisions cannot be constantly delayed or deferred” as she sought to uphold her new rule get day-to-day spending back into balance by the end of the decade.

The rate of social security contributions paid by employers will rise by 1.2 percentage points to 15% from April, and a threshold at which firms start to pay it will come down, raising an extra 25 billion pounds a year in five years’ time.

Company bosses warned that higher taxes, combined with planned new protections for workers and an increased minimum wage, could undermine Labour’s growth ambitions.

“This is a tough budget for business,” Rain Newton-Smith, the CBI’s chief executive, said.

A cap on a tax on business profits was welcome but the overall rise in employer costs would “hit the ability to invest and ultimately make it more expensive to hire people or give pay rises,” Newton-Smith said.

Other revenue-raising moves included changes to taxes on capital gains and inheritances and tax paid by private equity executives, non-domiciled residents and users of private jets and private schools.

But Reeves unexpectedly ruled out making more individuals pay basic and higher income tax rates after a freeze on the threshold for payments expires in the 2028/29 tax year.

She also extended a freeze on fuel duty and cut a tax on draught beer in pubs, measures that could help to reverse a fall in support for Starmer’s fledgling government in opinion polls.

In another significant move, Reeves said she would change a second fiscal rule to allow for more borrowing, paving the way for 100 billion pounds in investment over the next five years.

Reeves said the government will now target a fall in public sector net financial liabilities as a share of the economy, rather than public sector net debt excluding the BoE.

The latest forecasts showed the government was on course to borrow almost 142 billion pounds more over the next five years compared with previous estimates.

Combined with higher taxes, the outlook for investors remained difficult, Neil Birrell, Chief Investment Officer with Premier Miton Investors, said.

“It’s likely that gilt and equity markets will view the package as not as bad as it could have been. But with the investment plans being long-term in nature, it doesn’t feel like a budget for growth,” he said.

(Additional reporting by Andy Bruce, Suban Abdulla, Muvija M, Sachin Ravikumar, Andrew MacAskill, Alistair Smout, Elizabeth Piper, Catarina Demony, Michael Holden; Graphic by Sumanta Sen; Writing by William Schomberg; Editing by Hugh Lawson)