The Chancellor is under pressure to hike taxes this autumn after experts warned Britain’s “chronically weak” finances will force her into raids on pensions, booze, and tobacco. Elliott Jordan-Doak, of Pantheon Macroeconomics, said the Chancellor’s “litany of policy U-turns” had only “compounded the Government’s fiscal woes”.
He warned: “We think the Chancellor will need to resort to ‘sin’ and ‘stealth’ tax hikes, duty increases, and a pensions tax raid in order to meet her fiscal rules if she wants to meet her pledge of keeping headline tax rates unchanged.” He told the Telegraph: “We expect the bulk of those tax hikes to be backloaded towards the end of the forecast period, minimising any short-term growth implications. But that will buy the Chancellor only precious little time.
“The public finances are unsustainable in the long run and delaying action now increases the risks of needing to make sharper adjustments in the future, which would be more disruptive for economic activity.” The warning came after figures showed borrowing to fund day-to-day spending hit £42.8 billion in the first three months of the financial year.
Debt servicing costs are surging, with £41.4 billion spent on interest in the same period, up 26.7 per cent on last year. Dennis Tatarkov, of KPMG, said the figures showed the “longer-term picture for public finances remains challenging, as spending pressures, especially the cost of servicing debt, continue to mount”.
Public sector pay has also leapt 13 per cent to £74.4 billion so far this year, while welfare spending is running £1.4 billion above forecast after Reeves reversed reforms and restored winter fuel payments for most pensioners.
Tax receipts have disappointed too. Income tax revenue is £1.4 billion below forecast, while the OBR may yet downgrade the UK’s long-term growth prospects – a move economists warn would open up an even larger black hole.
Alex Kerr, of Capital Economics, said Reeves will “probably need to raise taxes by between £17 billion and £27 billion at the Budget later this year”. Martin Beck, of WPI Strategy, added: “The Chancellor’s decision to leave herself with just a £10 billion buffer against her main fiscal rule was always a high-stakes gamble. That cushion is probably shrinking, so tax rises this autumn still look likely.”
The National Institute of Economic and Social Research has suggested Reeves could face a hole of up to £50 billion – with inheritance and property tax rises under review. However, this figure seriously overstates the shortfall according to other experts.
