Rachel Reeves may be forced to raise taxes in a “blockbuster” autumn Budget, leading economists are warning.
The Institute for Fiscal Studies stressed that the Chancellor’s vow to stick to her fiscal rules while leaving herself “next to no headroom” meant that her economic plans would be “at the mercy of events”.
Just hours after Ms Reeves delivered her Spring Statement, IFS director Paul Johnson warned that even small downgrades to official forecasts could “mean more action is needed to fill a fiscal hole”.
He added: “And given global risks and shoddy UK data, a bigger downgrade is entirely possible.
“Indeed, the OBR (Office for Budget Responsibility) document points to the downside risk around its all-important productivity assumption.
“We might be in for another blockbuster Autumn Budget. What the Chancellor has all but guaranteed is another six months of damaging speculation and uncertainty over tax policy.”
Ms Reeves is already forecast to push Britain’s tax burden to a record high of 37.7pc of GDP in 2027-28, with taxes to remain around this level until at least 2030.
Ms Reeves added to speculation she was open to further tax rises when she refused to rule out a tax increase in her Budget this autumn.
When pressed on the possibility of tax increases or further cuts to spending, she said: “I’m not going to write four years’ worth of Budgets.”
The OBR, the fiscal watchdog, halved its forecast for UK economic growth for 2025 from two per cent to one per cent, though, it increased it for future years.
It highlighted how Ms Reeves had slashed public spending plans by billions to keep a “fiscal headroom” of just under £10 billion.
But it stressed: “This remains a small margin against the risk of further shocks to interest rates, productivity, or global trade.”
The OBR also emphasised how Brexit is damaging the UK’s economy.
“Weak growth in imports and exports over the medium term partly reflect the continuing impact of Brexit, which we expect to reduce the overall trade intensity of the UK economy by 15 per cent in the long term,” it said.
Ms Reeves blamed “increased global uncertainty” for the blows to the UK’s economy and public finances.
But her autumn Budget has been heavily criticised, particularly its £25 billion hike in National Insurance contributions for employers which is seen to have hit growth, businesses and to be leading to job losses.
Ms Reeves was forced to set out measures totalling around £14 billion, including a series of cuts, to ensure she met her “non-negotiable” goal of balancing day-to-day spending against tax receipts, rather than borrowing.
She confirmed a further squeeze on the welfare budget, building on cuts to the disability and incapacity bill set out earlier this month, with the package now expected to save £4.8 billion rather than the more than £5 billion in 2029/30 hoped for by ministers.
And she signalled cuts in Whitehall, with “voluntary exit schemes to reduce the size of the civil service”, taking advantage of technology to “make Government leaner, more productive and more efficient”, saving £3.5 billion by 2029/30.
The budget watchdog acknowledged a series of international factors at play, including the risk of a trade war triggered by US president Donald Trump’s tariff policies, but it also acknowledged a slump in business and consumer confidence since Ms Reeves’s first Budget.
It said that “significant uncertainty” surrounds both domestic and global economic developments, warning that if global trade disputes escalate to include 20 percentage-point hikes in tariffs between Mr Trump’s US and the rest of the world it would knock 1% off GDP and almost wipe out Ms Reeves’s headroom.
Shadow chancellor Mel Stride accused Ms Reeves of having “tanked the economy”.
“She taxed jobs and wealth creation, she’s destroyed livelihoods, businesses clobbered big and small, small companies - the backbone of our economy, enterprise - crushed on the altar of her ineptitude,” he said.
