OBR chief says higher tax is ‘not good’ for growth – or the government
Chancellor Rachel Reeves risks harming the UK economy’s potential to grow by inflicting extra tax hikes on Brits, the fiscal watchdog has warned, adding that the government risks losing out on returns in the longer run.
Rachel Reeves looks poised to raise taxes at this year’s Autumn Budget as leading City analysts believe the higher cost of borrowing and unfunded spending commitments on welfare will force the government to raise as much as £30bn.
But Richard Hughes, the head of the Office for Budget Responsibility, has warned the chancellor she could undermine her growth mission if taxes are raised further, pointing out the burden is nearing an “all-time high”.
Appearing before MPs on the Treasury Select Committee, who questioned him on the OBR’s devastating assessment of UK public finances, Hughes warned that the country’s ever-growing tax burden could stifle growth and restrain government expenditure.
“There are a number of different levers the government can pull,” Hughes told MPs.
“It also needs to bear in mind that higher and higher levels of taxes are also not good for growth.
“If higher research and development [expenditure] is being funded by a higher tax burden, there are some choices and trade offs that need to be paid for.”
A number of taxes, including a form of wealth tax or a hike to corporation tax surcharge on banks, have been mooted by government officials and commentators.
The OBR is also widely expected to downgrade growth forecasts, delivering a blow to Rachel Reeves as she attempts to keep the public purse in check.
Her revenue-raising exercise would help to restore her fiscal buffer and add extra funds to prevent similar issues from unfolding after the autumn, rebuilding “credibility” with bond markets.
Tax hikes to come amid forecast downgrades
Hughes said the OBR’s productivity forecasts were under review following wide scrutiny over its relative optimism, with the Bank of England’s projections being lower.
Rachel Reeves’ small £9.9bn headroom largely hinges on the OBR’s prediction that productivity will rebound to pre-pandemic levels.
She will be holding out for the OBR’s endorsement of her growth-focussed policies, many of which have been set out under the Leeds Reforms at the Mansion House speech.
Deregulation and a campaign to drive retail investing are key measures the chancellor hopes will drive the UK economy into action.
The OBR was questioned on why it did not make an assessment of the potential impact on growth from £5bn welfare savings, unveiled shortly before the Spring Statement only to be reversed after a rebellion from Labour backbenchers.
Hughes said the government had informed the watchdog of its plans too late, with Rachel Reeves still able to meet her fiscal rules without announcing cuts to welfare spending.
“Back in March, the Government decided to make £5 billion worth of welfare savings. They had £10 billion worth of headroom against their fiscal rule. They could have settled for five.”
“Chancellors can make a point about how much headroom they want against their fiscal rules. Recently they have left themselves very little.”
David Miles, who sits on the OBR’s committee, also warned the UK faced a “worrisome” future due to waning demand from defined benefit pension funds for gilts, otherwise government bonds.
“You’ve got to find people and induce them to hold bonds,” he said. “That means you’ve got to offer them a better deal.”
The watchdog said there will be a £20bn hit to long-term borrowing costs due to the decline in ownership, triggering an uptick in short-term bond issuance.
Long list of adverse fiscal risks
As OBR chiefs appeared before the Treasury Select Committee, the new director of the Institute for Fiscal Studies (IFS), Helen Miller, said public discourse and government policy had to move beyond an obsession with whether “run of the mill revisions” reduced the fiscal headroom.
“We need to break out of this cycle,” Miller said at an event hosted by the Institute for Government.
“I think it’s safe to assume that the chancellor will stick to her fiscal rules. But that alone doesn’t automatically equate to sustainable public finances.
“As the OBR reminded us all last week, there is a long list of adverse fiscal risks – put more bluntly, there are lots of reasons that demands for government spending could run far ahead of tax revenues.
“We need better designed policies. And we desperately need economic growth: while that wouldn’t eliminate the need for trade-offs it would make them more palatable.”