Tax rises are almost certainly coming, Britain’s leading fiscal think tank has said. Those taxes are most likely to fall on pensioners and the wealthy, according to Paul Johnson, director of the Institute for Fiscal Studies (IFS).
‘There is a good chance that economic and fiscal forecasts will deteriorate significantly between now and an autumn Budget. If so, she will need to come back for more, which will likely mean raising taxes even further,’ the IFS director said. The tax burden is already just a year away from reaching its highest level in history – beating levels not seen since 1948.
Reeves continues to blame a ‘changing world’ for the economic woes we now face
The Chancellor has returned her headroom against her ‘ironclad’ fiscal rules to £9.9 billion – the exact same margin for error that was wiped away after the Budget last autumn. This means that a fairly minor downgrade to the OBR’s forecasts could quickly force the Chancellor to have to balance the books again. More spending cuts will not be politically palatable to her, and so at that stage it seems tax hikes would be the only option.
Paul Johnson warned that we now face ‘months of speculation over what those tax rises might be – a raid on pensions, a wealth tax on the richest, another hike to capital gains tax?’ Such speculation could upset the markets and ‘cause economic harm’.
Reeves continues to blame a ‘changing world’ for the economic woes we now face. It is certainly true that the uncertainty and trade barriers caused by Trump’s tariffs – the latest of which include a 25 per cent levy on all car imports – are pushing borrowing costs up and dampening growth prospects both in the UK and around the world.
Richard Hughes, chairman of the Office for Budget Responsibility, also warned this morning that significant tariffs on the UK could wipe out Reeves’s headroom:
If you look at what happens if tariffs go up to 25 per cent across the world on all countries, including the UK and the EU and the rest of the world, that could knock about 1 per cent off GDP next year. That itself is enough to wipe out all the headroom against the Chancellor’s fiscal rules.
However, the IFS points out that the fiscal downgrade that wiped out Reeves’s headroom was by no means unprecedented. Chancellors in 2011, 2013 and 2016 saw far worse downgrades to their fiscal prospects but faced less trouble because they had left themselves with greater headroom.
The fundamental problem Britain now faces when it comes to balancing the books is that the size of the state ballooned during the Covid pandemic: ‘Both tax and spending will be more than 4 percentage points of GDP – well over £100 billion – higher at the end than the start [of this decade],’ Johnson said. Without serious economic growth, we simply cannot afford to maintain those levels of services, welfare handouts and pensions. The only path forward then will be major tax increases for us all – not just the wealthy.
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