Rachel Reeves could be forced into a repeat of her massive tax raid Budget in a desperate bid to balance the government’s books, economists have warned.
The Chancellor is trying to move on after her outburst of emotion during PMQs yesterday.
But she is facing an increasingly grim position after a Labour revolt forced the dropping of £5billion curbs to benefits.
Ministers have already humiliatingly U-turned on slashing winter fuel allowance for pensioners, while restive MPs are demanding an end to the two-child benefit cap and more defence spending.
The stalling economy and rising debt interest costs – reflecting market nerves at the prospect of more borrowing – look to be backing Ms Reeves into a corner ahead of her fiscal package this Autumn.
The Chancellor has been adamant that she will not break her fiscal rules or the Labour manifesto commitment not to increase income tax, VAT or employee NICs.
She has also stated she will not bring in a tax bomb as big as the £41billion imposed last year.
Keir Starmer repeated this morning that the government had already taken the ‘big and heavy decisions’, although he refused to rule out tax increases.
However, Ben Zaranko of the respected IFS think-tank said the increase in the burden could be of a ‘similar scale’.
Rachel Reeves could be forced into a repeat of her massive tax raid Budget in a desperate bid to balance the government’s books, economists have warned
He told The Times ‘avenues are closing’ after department spending plans were fixed for the next three years and the government backed down on welfare.
‘It’s not hard to imagine a world where they are of a ballpark similar scale to last autumn,’ Mr Zaranko said.
‘If you have the perfect storm of economic forecasts being downgraded, additional spending commitments because these reforms haven’t got through parliament and the world is in a gloomier place generally, you could comfortably be into double figures billions even before you talk about any retail offers.
‘A £20, £30, £40billion budget is not what the government would want but it’s not impossible by any means.’
The Budget last year was the biggest tax raising package on record, including an eye-watering hike to employer national insurance that has been blamed for crushing business investment and recruitment.
Analysis by Deutsche Bank suggested that the hole Ms Reeves needs to fill could be between £18billion and £32billion.
It pointed to market conditions adding £2-£3billion to borrowing by 2029, and Donald Trump’s trade war impact costing approximately £5billion.
Productivity growth downgrades could degrade the fiscal position by another £15billion, while welfare backtracking is estimated to add up to £9.5billion to spending.
‘We continue to see £10-15billion in tax hikes announced as part of the forthcoming Budget. But this should now be seen as the floor for tax hikes in the autumn. The risk is that Chancellor Reeves needs to dig deeper to deliver even more,’ the bank’s note said.
The analysts speculated that revenue-raising measures could include extending the hated freeze on income tax thresholds, with that stealth raid potentially raising £7billion a year.
Council tax reform was mooted to bring in £1 billion, raising the Bank Levy another £1.5billion and pension tax reliefs £2 billion.
Other measures including tax collection could drum up some more cash towards the gap.
But Deutsche Bank cautioned that if the shortfall is more than £20billion breaking the Labour manifesto and hiking income tax, VAT or NICs could be unavoidable.
In May it emerged that Angela Rayner had written to the Chancellor in March urging eight tax hikes, seemingly as a way to avoid benefits curbs.
Keir Starmer repeated this morning that the government had already taken the ‘big and heavy decisions’, although he refused to rule out tax increases
They included reinstating the pensions lifetime allowance, changes to dividend taxes, a raid on a million people who pay additional rate income tax and a higher corporation tax level for banks.
Allan Monks, an economist with JP Morgan, told Reuters earlier this week that the OBR had hinted at downgrades in its forecast evaluation report.
‘The key question now is magnitude,’ Mr Monks said, adding that cutting 0.1 to 0.2 percentage points off the forecast for annual potential economic growth could cost the public finances between £9billion and £18billion pounds a year.
At an NHS event this morning, Sir Keir said: ‘No prime minister or chancellor is going to write a budget in advance, but we did really tough stuff in that budget last year.
‘We made sure that we stabilised the economy and we took the big and heavy decisions early on.
‘And that’s what we meant by what we said when the Chancellor said that before, it’s what I mean and say again today.
‘We’ve done a lot of the heavy lifting, we’ve done a lot of the hard yards.
‘As a result of that turning our economy around: the fastest growth in the G7 in the first quarter of this year, business confidence at a nine-year high and record investment.’
