Reeves may need larger fiscal buffer to ‘build credibility’
Chancellor Rachel Reeves may need to make her headroom larger than £9.9bn in the autumn to restore credibility and fund policy U-turns, an economics think tank has warned, prompting warnings that “unpopular tax hikes” are coming down the line.
Proposed welfare reforms saved the government £4.8bn at the Spring Statement in a last minute rush to maintain Reeves’ fiscal buffer.
But after revolt from backbenchers led to Downing Street watering down reforms by protecting personal independence payment (pip) recipients indefinitely and easing changes to Universal Credit, leading economists have warned that Reeves’ headroom risks getting wiped out entirely.
Ben Caswell, a senior economist at National Institute of Economic Social Research (NIESR), said Reeves risked seeing her £9.9bn headroom disappear if the original version of the welfare bill was not passed while the Institute for Fiscal Studies estimated new proposals on pips would cost the government £1.5bn.
The latest set of changes to the welfare bill comes after the Labour government partly restored winter fuel payments, costing an additional £1.25bn.
CityAM also revealed the government’s decision to take control of British Steel was set to cost the government £900m, per an early estimate made by the Office for National Statistics (ONS).
Caswell said Reeves may have to consider not only restoring her headroom but build a larger one to win support from the bond markets and businesses across the country.
“More considered policy could help reduce political churn and the associated economic cost, particularly when consumer and business confidence is already low,” Caswell said.
“Clarity, consistency and a larger fiscal buffer needs to be established so that the Chancellor can build credibility against her fiscal rules.”
Reeves to hike ‘unpopular taxes’
Caswell suggested Reeves may have to make “unpopular tax hikes” later this year to prevent further speculation on fiscal policy in the lead-up to future budgets.
Reeves and Keir Starmer have pointed to foreign economic threats and a “world that is changing before our eyes” as reasons for instability.
But economic uncertainty faced by businesses and investors was due to “piecemeal policy tinkering” by the UK government, according to Caswell.
Shadow Chancellor Mel Stride said the “screeching U-turn” on welfare marked “another unfunded spending commitment” that would cost taxpayers.
Before changes to the welfare bill, City analysts were already predicting that the Chancellor was poised to raise taxes later this year.
KPMG economist Yael Selfin said Reeves would have to make a “top up” of around £20bn while Capital Economics said tax hikes could total as much as £23bn.