UK tax rises: The five steps that could lead to increases
Chancellor Rachel Reeves has set out her plans for the UK economy in her Spring Statement and is on track to meet her self-imposed rules on the public finances, which she has said are "non-negotiable".On the face of it, that sounds like a good thing. So why are people saying that she may struggle to meet them and the only way she may do so is by raising taxes?It's a complicated picture.
1. Not much spare money
Ahead of the Spring Statement, the chancellor had been under pressure, with speculation over how she would be able to meet her self-imposed financial rules, one of which is to not borrow to fund day-to-day spending.In October, the government's official economic forecaster, the Office for Budget Responsibility (OBR), said that Reeves would be able to meet that rule with £9.9bn to spare.An increase in government borrowing costs since then meant that that room to spare had disappeared. Now big welfare cuts and spending reductions in the Spring Statement have restored it.Almost £10bn may sound like a lot, but it's a relatively small amount in an economy that spends £1 trillion a year, and raises around the same in tax.In fact it is the third lowest margin a chancellor has left themselves since 2010. The average headroom over that time is three times bigger at £30bn.
"It is a tiny fraction of the risks to the outlook," Richard Hughes from the OBR told the BBC.He said there were many factors that could "wipe out" the chancellor's headroom, including an escalating trade war, any small downgrade to growth forecasts or a rise in interest rates.
2. Predicting the future is difficult
Which brings us on to the precarious nature of making economic forecasts."All forecasts turn out to be wrong. Weather forecasts also turn out to be wrong," says Hughes.Predicting what will happen in the future, especially in five years' time is hard, and is subject to revisions. You could be forgiven for not predicting a war or a pandemic, for instance.The respected think tank, the Institute for Fiscal Studies (IFS), has already said there is "a good chance that economic and fiscal forecasts will deteriorate significantly between now and an Autumn Budget".A case in point, only hours after Reeves delivered her statement in parliament, US President Donald Trump announced new 25% tariffs on cars and car parts coming into the US.
3. Car tariffs a sign worse could come
Reeves admitted the car tariffs would be "bad for the UK" but insisted the government was in "extensive" talks to avoid them being imposed here.According to the OBR, these import taxes would have a direct effect on goods totalling around 0.2% of GDP.Before Trump's announcement, the OBR had warned of the risk of an escalating trade war, and while the proposals do not exactly match the watchdog's worst-case scenario, which would see the UK retaliate, Hughes said it had elements of it.Although 0.2% is a tiny amount, nevertheless it will affect the economy. And in the OBR's worst-case scenario, 1% would be knocked off ecomic growth.
Live: Follow the latest reaction to the Spring StatementKey points from the Spring Statement at a glanceThree ways the changes could affect you and your moneyWatch: Henry Zeffman on what you need to know... in 58 seconds
4. Uncertainty means firms and people don't spend
Trump's trade policies and the fact that nobody seems to know whether he will follow through with his threats, U-turn on them, or how he will react to others is just one way his presidency is making the world so uncertain at the moment.The war in Ukraine continues, despite Trump's pledge to end it. The UK, along with Germany, has said it will increase defence spending. Trump has long called for European members of Nato to spend more on defence, and there are also fears that if the US does make a deal with Russia to end the war, that could leave Europe vulnerable.Domestically, businesses are also facing a worrying time as they brace for a rise in costs in April as employers' National Insurance contributions, the National Living wage and business rates are all set to go up.Some firms have said they have put off investment decisions as a result, and many have warned of price rises or job cuts. If these materialise, then that will knock growth.
5. Break the rules or raise taxes
Given all of the above, if the chancellor's headroom were to disappear, why would that matter?Reeves has staked her reputation on meeting her fiscal rules, pledging to bring "iron discipline" and provide stability and reassurance to financial markets, in contrast to former Prime Minister Liz Truss, whose unfunded tax cuts spooked the markets and raised interest rates.So if she is still to meet her rules and not borrow to fund day-to-day spending, that would mean either more spending cuts or tax rises.The government has already announced big cuts to the welfare bill as well as plans to cut the civil service and abolish several quangos including NHS England.But as Paul Dale, chief UK economist at Capital Economics, puts it: "Non-defence spending can only be cut so far."By leaving herself so little wiggle room and with such a precarious economic outlook, "we can surely now expect six or seven months of speculation about what taxes might or might not be increased in the autumn," says Paul Johnson from the IFS.That speculation itself can cause economic harm, he says.Reeves has not ruled out tax rises but told the BBC there were "opportunities" as well as "risks" for the UK economy.
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Rachel Reeves with Jo Stevens , Secretary of State for Wales (Image: WalesOnline/Rob Browne ) The £445m announced in the spending review is made up of £300m to start work on several projects including five new stations around Cardiff and Newport, and a series of improvement works including at Cardiff West junction measures to improve capacity in north Wales at Padeswood Sidings. Another £48m is going to the Welsh Government to spend on the Core Valleys Lines. And a further £97m will be allocated to develop projects over ten years. When pushed on whether there was more to be done to address the historic underfunding of Welsh rail compared with the rest of the UK, Ms Reeves simply said: "We can't change the past but we can change the future." She added that the funding that Wales has seen so far is a "far cry from what we had when we had a Conservative Government in the UK that wasn't prioritising Wales, wasn't standing up for Wales and wasn't working with the Labour Government here in Wales." Chancellor Rachel Reeves visits the Transport for Wales depot in Taffs Well (Image: WalesOnline/Rob Browne ) She defended her government and its spending, saying it was delivering "record" funding for Wales. Ms Stevens also quickly jumped in to describe the effect that the nearly half a billion pounds investment is set to have as "transformational". Here is the interview with Rachel Reeves in full: Rachel Reeves defended her government's spending and said that they "can change the future" of Welsh rail. (Image: WalesOnline/Rob Browne ) Q: I imagine you're here today after the spending review and the announcement of £445 million going towards Welsh rail. Is there a reason why that figure is just £445 million and can you give any more detail on what that's going to be spent on? RR: Yes, I'm in Wales today after a significant investment into Wales at the Spending Review - a Labour government in the UK working with a Labour Government here in Wales to deliver on the people's priorities. The money, the £445 million, a big investment in railways in Wales, will improve the Core Valleys line, deliver those five Burns stations from the Burns review in full and make improvements with the Cardiff West Junction and Padeswood sidings as well as the level crossing improvements in North Wales to increase the frequency of the trains, to reduce the journey times and to invest in better infrastructure for the people of Wales. Rachel Reeves and Jo Stevens, Secretary of State for Wales (Image: WalesOnline/Rob Browne ) Q: On that figure, experts have said that perhaps double that would be needed to catch up with the historic injustice that I think you've recognised in terms of Welsh rail. So do you think this number provides the opportunity for Wales to be treated fairly or is there still, as experts are saying, a long way to go to ensure that Welsh rail catches up with the rest of the UK? RR: We can't change the past but we can change the future. Labour has not been in government in the UK for 14 years but in our first budget, and now in our first multi-year spending review, we're putting significant investment into Wales - the record and biggest settlement since devolution for the Welsh government, the investment in rail but also the £118m investment in coal tip safety, which is what the Welsh government asked for - we as a UK Labour government are delivering that. As a result of the devolution settlement we made last year for the Welsh Government, we've also seen NHS waiting lists fall for four months in a row. That's a far cry from what we had when we had a Conservative Government in the UK that wasn't prioritising Wales, wasn't standing up for Wales and wasn't working with the Labour Government here in Wales. The Treasury is providing £300m for five new stations around Cardiff and Newport between 2026 and 2030, and a series of improvement works including measures to improve capacity in north Wales. Another £48m is going on the South Wales Metro. Welsh Transport Secretary Ken Skates has said that almost £100m will be allocated to develop projects over ten years. Q: There's been long-term, multi-billion-pound investments announced for the north of England. Is there a reason why there's maybe less of a commitment for Welsh rail projects? RR: We only came into office last year and in our first budget we provided a record settlement for Wales and we have then followed that up with an even bigger settlement in the multi-year spending review and on top of that direct investment here in Wales both in rail and in coal tip safety. We are working closely with Jo and the team at the Welsh office and are also working closely with the Welsh Government in Cardiff. We're delivering on the priorities of the people in Wales with this substantial investment which is going to improve journey times, with more reliable services and a big boost for people wanting to access good jobs, paying decent wages at the investment zones and in the major cities. WalesOnline's campaign for fair funding For generations, Wales' rail network has been starved of investment. We've been left with a rail network that is outdated and not fit for the nation's needs. There is no good reason why more money should be spent per resident in England on rail infrastructure than in Wales. We have far less electrified track than England and fewer modern services. We've been campaigning since the start of the year to raise awareness of the two massive opportunities Keir Starmer's government has this year to act. We wanted to put pressure on politicians to do something about it. You can help put pressure on him to do use this historic opportunity by signing WalesOnline's petition on the UK government website calling for fair rail funding for Wales. Very simply, we want people in England and Wales to be treated the same when it comes to rail. We've now had the results of the first of those two massive opportunities. Thanks to the pressure from the Welsh Government, Welsh Labour MPs, opposition parties and ourselves, Rachel Reeves has promised Wales nearly half a billion pounds for rail. There are arguments over whether this in itself is enough, what it will be spent on and what time period it is being spent over. But it is undeniably good news that work can start on some much needed projects. These include five new train stations on the south Wales mainline. Later on in the year, Mr Starmer's government is planning a major bit of rail legislation that will be a once-in-a-generation chance to put in place a mechanism to guarantee fairness in perpetuity. Read more about this here. There are arguments about how this should be done but widespread agreement that things must change. One academic told WalesOnline the Wales always comes at the bottom of the pile and will continue to unless there is full devolution. Another told us there was no appetite in either Cardiff Bay or Westminster for devolution and this lack of ambition was repeating the biggest mistake the Welsh Government had ever made. There are fears that unless there is full devolution, Wales will suffer every time the UK government cuts spending but protects major projects in England, as is happening right now. However the Welsh Government believes fair funding can be delivered without full devolution, which is does not want. And the head of a passenger body told us he didn't care who got the money as long as they did a good job with it, adding more cash could make a huge difference. Article continues below JS: It's going to be transformational. You're talking about nearly half a billion pounds being invested with most of it over the space of three to four years. We'll be going as fast as we can to deliver these projects in a way that will transform people's lives. They will see change on their doorstep just like here in Taffs Well people are seeing change from the investment into the core Valleys lines and investment into new trains. We're going to get people around Wales quicker, more often. Going into new jobs, meeting friends and family, our tourism destinations, this is going to make such a difference. Q: In terms of the Railways Bill coming later this year, what would you like see in that to ensure Wales gets the investment it needs, going forward? JS: Well the Chancellor has just announced a significant historic investment this week. Part of that money will be going on to developing further projects after the period of the spending review so that tells you about our commitment to Wales. As I say, we're delivering as quickly as we can, as fast as we can, as widespread as we can and people can look forward to seeing the benefits of a Labour government in Westminster working with the Welsh Labour government to make those infrastructure changes in Wales. We've had very little for the last 14 years, this week we started to make a difference.
