LONDON: UK Chancellor of the Exchequer Rachel Reeves is facing a £51bil (US$68bil) shortfall to fill at the autumn budget, according to a prominent economic think tank that warned she will likely need to break Labour’s pledge not to raise major taxes.
Slow growth, higher-than-expected borrowing and U-turns on plans to cut welfare spending mean Reeves is on track to miss her rule to match day-to-day spending with tax revenue in 2029-2030 by £41bil, the National Institute of Economic and Social Research said on Wednesday.
It means more than £51bil of tax hikes or spending cuts would be needed to restore her current fiscal buffer of just under £10bil.
With businesses still reeling from a £26bil hike in payroll taxes in April, such a large hole in the government’s budget plans would imperil Labour’s manifesto pledge not to raise taxes on working people, specifically income tax, national insurance contributions or value-added tax that together account for around two-thirds of all revenue raised by the Treasury.
Prime Minister Keir Starmer defended his government’s stewardship of the economy on Wednesday, saying his administration had overseen rising wages and a succession of interest rate cuts.
“Some of the figures that are being put out are not figures that I recognise,” Starmer told broadcasters.
“In the autumn, we’ll get the full forecast and obviously set out our budget.”
He added that the government’s focus would “very much be on living standards and making sure people feel better off.”
Reeves is caught between febrile bond markets unlikely to tolerate more borrowing and Labour lawmakers who recently rebelled over plans to curb welfare spending.
She is coming under pressure to extend freezes to tax thresholds and consider more radical measures including a wealth tax.
“It’s becoming increasingly difficult to see how the government meets its fiscal targets, sticks to spending promises and avoids tax increases on working people,” said David Aikman, director of NIESR.
“Something will have to give.”
Filling the £50bil hole is equivalent to raising the basic and higher rates of income tax by five percentage points.
Just extending the freeze on income tax thresholds would leave Reeves short, raising £8.2bil.
She will revise her fiscal plans at the autumn budget after a bruising spring and summer for the chancellor after reversals on welfare and winter fuel subsidies for pensioners.
Her headroom will also be eroded if the Office for Budget Responsibility downgrades its growth projections as economists predict, bringing the watchdog closer in line with more pessimistic private-sector forecasts.
NIESR predicted UK gross domestic product will grow 1.3% in 2025 and 1.2% next year, though it warned that tax rises in the autumn would likely weaken the economy.
“If the chancellor does take the sort of action required at her budget to bring her back into line with her fiscal rules, then that would have a growth impact,” said Stephen Millard, deputy director at NIESR. — Bloomberg
