Workers could be hit with a crippling £10bn tax raid after Chancellor Rachel Reeves ‘engineered a trap for herself’, a leading think tank has warned. The Institute for Fiscal Studies (IFS) has issued a stark alert, claiming that Reeves has dangerously little room to manoeuvre in her economic strategy.
As a result, she may be forced to extend the stealth tax freeze on income tax thresholds, meaning millions could see their tax burden quietly rise. With financial markets turning, GDP growth barely rising, and the looming spectre of a global trade war triggered by tariffs triggered by Donald Trump, the economic picture is looking gloomy.
Ms Reeves pledged in October to borrow only for investment and to ensure that debt falls as a share of GDP. However, rising borrowing costs and slower-than-expected growth have put these commitments at risk.
Matthew Oulton of the IFS did not mince his words, warning: “Aiming to meet inflexible, pass-fail fiscal targets by the slimmest of margins was a risky strategy from the outset.”
Ms Reeves may be forced into an emergency tax grab during the Spring Statement later this month – an event that was never meant to be a full-scale fiscal intervention. One of the most controversial options on the table is extending the income tax threshold freeze for another two years, a move that would drag more people into higher tax bands and quietly generate around £10bn extra revenue by 2029/30.
Meanwhile, the economic storm clouds continue to gather. The British Chambers of Commerce (BCC) has just slashed its growth forecast for the UK, blaming rising taxes and economic uncertainty.
Key forecasts now show:
Business investment stalling, growing just 0.6% instead of the expected 0.9%.
UK GDP growth down to 0.9% this year, from an earlier projection of 1.3%.
Unemployment rising to 4.6% this year.
Inflation above the Bank of England’s 2% target until 2027.
Vicky Pryce, chairman of the BCC Economic Advisory Council, painted a difficult picture. She told the Telegraph: “We’ve seen very little growth in the private sector… There is a general malaise.”
And it is not just businesses feeling the squeeze. The Resolution Foundation warns that without radical reform, the working-age benefits bill is on track to soar by £32bn by 2030.
One possible fix could be freezing health-related benefits in cash terms, which could claw back £1bn per year. Another is to get more people back to work, easing the burden on the welfare system.
The UK’s precarious economic position is also being worsened by uncertainty abroad. Donald Trump’s renewed trade war threatens global supply chains, with tariffs being implemented on Canada, Mexico, China, and potentially EU products.
Businesses are rattled. A survey by the Adam Smith Institute found that over three-quarters of business leaders have low confidence in the UK economy, blaming spiraling taxes, inflation, and energy costs.
And as if that was not enough, new data from S&P Global shows that businesses in Britain’s dominant services industry are cutting jobs at the fastest rate since November 2020, during the depths of the pandemic.
Tim Moore, from S&P Global, warned: “Less upbeat business expectations and another month of sharply rising input prices led to net job shedding… Employment has now decreased for five months in a row. Aside from the pandemic, this represents the longest period of falling employment since early 2011.”
With the economy in crisis, all eyes are on Reeves and the Government’s next move. However, a Government spokesperson refused to be drawn into speculation, merely stating: “The Government’s commitment to fiscal rules and sound public finances is non-negotiable.”
A clearer picture will emerge on March 26, when the Office for Budget Responsibility releases its latest forecast.
