Taxes will probably rise again in the new few years as wage increases are hit, leading economists warned the day after the Budget.
The Institute for Fiscal Studies also stressed that household income growth would be the worst in history during this Parliament, apart from the previous five years.
Chancellor Rachel Reeves on Wednesday announced a £40 billion tax raid, including some £25 billion from a National Insurance hit on employers, more than £32 billion of extra borrowing, and tens of billions of pounds being ploughed into public services and better infrastructure, including £22.6 billion more for day-to-day spending on the nation’s health.
However, IFS director Paul Johnson said: “The most striking thing about this Budget is that the spending plans don’t quite look like the generous ones they apparently immediately appear to be.
“So, we have got a lot of additional spending this year, a remarkable amount of additional spending this year, and a fair bit next year.
“But the Chancellor has rather taken a leaf out of her predecessor’s playbook in terms of the years after that.
“So, if you look from 2026/27 onwards, spending is growing very, very slowly in these figures to a degree that I would describe as almost as implausibly slowly as what Jeremy Hunt was suggesting last year.
“She needed to do that, just as Jeremy Hunt needed to do that, to make her fiscal arithmetic balance.”
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He added: “Now, it’s possible to argue that we will be a world that spending rises so much this year and next that no more money will be needed for the next three years of this Parliament.
“But I bet an awful lot that that is not what is going to happen, particularly given the problems that the Chancellor has clearly had selling this to her Cabinet colleagues this time around.
“I suspect we will end up with even more spending, possibly considerably more spending than is currently planned and that will probably mean, unless she gets lucky with growth, more tax rises to come next year or the year after.”
But the official figures from the Office for Budget Responsibility on GDP growth were for it to be 1.1% in 2024, 2.0% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028 and 1.6% in 2029.
“The growth forecasts here are pretty awful,” added Mr Johnson.
“There is a bit of an increase in the first year or two because the OBR says that chucking loads of money at the economy that is going to help growth.
“But go two or three years out, then, first of all there is a great big tax rise in there which is going to reduce people’s disposable incomes and the OBR says the increases in borrowing and so on are going to increase interest rates and inflation and the consequence of all of this is that the OBR has also downgraded its projections of household income growth.
“It now says this Parliament will be the worst in history for household income growth, apart from the last Parliament which is not going to be a recipe for a happy electorate in four years time.”
He also highlighted that much of the increase in National Insurance for businesses would feed through into smaller pay rises for workers.
“Most of the impact of this National Insurance rise will appear in lower wages than would otherwise have happened,” he said.
Ms Reeves said Labour’s first Budget since 2010 would be a one-off to “wipe the slate clean”.
The overall tax burden will reach a record 38.3% of gross domestic product (GDP) in 2027-28, the highest since 1948 as the UK recovered from the impact of the Second World War.
And changing the way government debt is measured allows the Chancellor greater flexibility to borrow, resulting in what the OBR called “one of the largest fiscal loosenings” in recent decades.
The tax hikes and increased borrowing allow Ms Reeves to provide a £22.6 billion increase in the day-to-day health budget as well as a £3.1 billion increase in the capital budget, which she called the “largest real-terms growth in day-to-day NHS spending outside of Covid since 2010”.
The Budget measures include:
- Capital gains tax to go up by £2.5 billion, with the lower rate to rise from 10% to 18% and the higher rate from 20% to 24%.
- Changes to inheritance tax, including bringing pension pots within the tax from April 2027, and reducing reliefs for agricultural and business property, raising a total of £2 billion a year.
- Income tax thresholds will rise in line with inflation from 2028-29, reducing the impact of “fiscal drag” where rising wages see people pulled into higher tax bands.
- The freeze on fuel duty will continue, including maintaining the existing 5p cut.
- Draught duty will be cut by 1.7%, knocking a penny off a pint in the pub, but other alcohol rates will increase.
- Imposing VAT on private schools will raise £1.7 billion by 2029-30
Changes to the energy profits levy and air passenger duty rates will rake in £3.6 billion.
- The stamp duty land tax surcharge for second homes will increase by two percentage points to 5% from Thursday.
The latest OBR forecasts indicate that inflation will rise to 2.6% in 2025 - significantly above the 1.5% rate previously predicted - “partly due to the direct and indirect impact of
Higher rates on employers’ national insurance contributions (NICs) and a lower starting threshold will raise £25.7 billion by 2029-30.
The rate will increase by 1.2 percentage points to 15% from April 2025, with payments starting when an employee earns £5,000, down from the current £9,100.
The OBR forecasts that by 2026-27 some 76% of the total cost is passed on through lower real wages - a combination of pay cuts and increased prices.
The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the watchdog said.