Economists warn Rachel Reeves could be forced to make ‘£20bn tax grab’
Top economists have warned Brits to brace for another wave of painful tax hikes in the autumn after Rachel Reeves unveiled the government’s £190bn spending splurge.
After unveiling her Spending Review, which laid out extra spending on the NHS, defence, housing and nuclear energy, the Chancellor told MPs she was committed to ensuring public finances remained in a “stable” condition and to treating taxpayers’ cash with greater “care”.
But City analysts said her Spending Review did not allay fears of further tax rises being made imposed this year as the government risked facing a shortfall of up to £23bn.
KPMG’s chief UK economist, Yael Selfin, said the current growth forecast of just 1.2 per cent would lead to public sector revenues falling below Reeves’ expectations given an increase in the cost of borrowing due to high gilt yields and a stalling in interest rate cuts.
“Looking ahead to the Autumn Budget, by cementing in substantial increases in departmental spending, Reeves has made further tax rises look increasingly inevitable,” Selfin said.
“The recent U-turns on welfare and higher borrowing costs mean that the chancellor may need to find an additional £20bn in taxes later this year.”
Business “cannot shoulder more” tax hikes
The KPMG economist said such a radical tax rise would be “difficult” without breaking Labour manifesto pledges or increasing costs for businesses.
Capital Economics’ Ruth Gregory predicted that Reeves may have to raise as much as £23bn this year “if she wishes to avoid an adverse reaction in the markets,” adding that “whatever happens, it’s clear even harder decisions for Reeves lie further down the line.”
Business groups have also warned the government against increasing taxes on British firms, with the Confederation of British Industry’s chief executive, Rain Newton-Smith, claiming businesses “cannot shoulder more” tax hikes and vowing “to hold the chancellor to account that she won’t come back for tax rises on business.”
Consultancy Oxford Economics said that “to make the fiscal position look healthier, the government might decide it has some scope to pencil in additional current spending restraint in 2029-2030” but warned that such a move “would risk undermining the government’s fiscal credibility, so we still expect the government will need to implement relatively large tax rises in the autumn Budget.”
Pension pots at risk of tax hikes
Some analysts have suggested that the government may take aim at wealthy pensioners and savings pots in a future tax grab.
AJ Bell’s Laith Khalaf said tax relief on pensions could be for the chop, with the re-introduction of the pensions lifetime allowance, abolished by former Chancellor Jeremy Hunt, potentially on the cards.
“Amid growing fiscal pressure, there’s a real risk that pensions tax reform speculation, especially around tax-free cash and tax relief, will return to the headlines.”
Tomm Adam, a partner at financial advisory firm Blick Rothenberg, said pensions tax relief currently in place makes it a “perfect target” for tax hikes to be introduced.
“Annual allowance reduction, lifetime allowance reinstatement, and salary sacrifice abolition are all likely in the Treasury’s crosshairs.”
Tweaks to individuals’ pensions would follow vast reforms spearheaded by pensions minister Torsten Bell in a flagship bill, which will allow the government to take a “reserve power” on funds’ targets for spending on UK assets.
Pensions funds have come to be seen as essential players in Reeves’ growth mission following the £50bn Mansion House Accord, which was struck in May.
Khalaf said the Chancellor could make a “firm commitment” to boost confidence among funds and allow investors to “plan for the long term”.
Fiscal rules slammed
City analysts have suggested the only way-out for Reeves may be in finding further cuts or changing fiscal rules.
But the Chancellor re-iterated that her fiscal rules remained “non-negotiable” in a message to investors’ concerns over borrowing levels surging higher than expected.
Her commitment to balancing the public purse on a rolling three-year horizon came as economists at the International Monetary Fund and OECD criticised the fiscal rules and Reeves’ “insufficient” fiscal buffer.
Lindsay James, investment strategist at Quilter, said investors had become “increasingly cynical” about fiscal rules.