‘Fiscal fiction’: IFS challenges Reeves’ tax measures
The Chancellor may need to come back for more tax rises at a future Budget, according to the Institute for Fiscal Studies (IFS) which warned much of the headroom Rachel Reeves carved out for herself relied on “near heroic restraint” on departmental spending in an election year.
Helen Miller, the think tank’s director, said that the Chancellor’s pledge to slash the rise in day-to-day spending by 50 per cent between 2028 and 2030 would involve “near heroic restraint”, despite it representing a large share of her so-called fiscal headroom.
The government had previously committed to raising departmental budgets by one per cent a year over the last two years of the parliament. But in fiscal projections announced at Wednesday’s Budget, ministers committed to reducing those spending plans to a rise of just 0.5 per cent by rooting out “inefficiencies”, saving around £4bn in 2029-30.
The savings represent a third of the fresh headroom carved out by the Chancellor to appease nervous bond markets and decrease the chances of breaking her fiscal rules again and having to return for another major tax-raising budget closer to an election.
‘All will be revealed’
“All will be revealed at the 2027 Spending Review,” Miller said in the think tank’s closely watched post-Budget conference. “Perhaps the government really will be able to find new efficiency savings. Or maybe when the time comes and the election looms, it will find that the spending plans are unrealistically low.”
Miller added that the fact the promised spending restraint was coupled with a similarly backloaded approach to tax rises that only “delayed the pain [and were] reminiscent of fiscal fictions of yesteryear”.
Rachel Reeves took the country’s overall tax take to the highest it has been in history during Wednesday’s Budget, generating an additional £22bn of annual revenue for the Exchequer by the end of the accounting period in 2030.
Headline spending promises like the £5bn decision to end the two-child limit on welfare and the previously announced u-turns on winter fuel allowance cuts will be delivered quickly or are already in place. But the majority of announced tax rises – including a ‘mansion tax’ on homes worth more than £2m and a radical overhaul of electric vehicle taxation – will not come into force until 2028, leaving economists sceptical of whether they will be implemented months before a general election.
‘Spend now, pay later’ Budget
Analysts warned that the sequencing – dubbed a ‘spend now, pay later’ Budget by critics – could lead to a run on UK government bonds and sterling – if their credibility is further eroded.
Richard Potts, economist at Bondford, said: “For markets, the clearer message from today is that tax levels are rising while the spending discipline of this government remains questionable – an imbalance unlikely to inspire confidence in the long-term.”
Market reaction to the Budget has been muted, with the interest rate on 10-year government bonds, known as gilts, falling by roughly three basis points since the measures were revealed. Sterling has climbed by one per cent against the dollar.
Economists have attributed the subdued response to a combination of the Chancellor’s decision to expand the breathing room she has given herself against her fiscal rules to £22bn and vast number of leaks about the measures in the Budget ahead of time
“The stability we’ve seen is a little bit of a headscratcher,” Michael Brown, senior research strategist at Pepperstone, told CityAM. “If there’s anyone who seriously believes that such a huge amount of tax hikes are going to be delivered the year before, or the year of, the election then I’ve got quite a lot of bridge to sell them.”
Brown added that the make-up of future gilt sales, which will mostly comprise shorter-dated bonds that are mostly driven by Bank of England interest rates, will have eased investor nerves. The fact the Labour leadership appears to have successfully sold the package to its restive backbench MPs, staving off the immediate prospect of a leadership challenge, also helped appease investors.