Reeves tax raid blamed as UK suffers dramatic growth downgrade

Telegraph

7 hours ago

Britain's leading business group has slashed its UK growth forecasts after Rachel Reeves's tax raids slammed the brakes on the economy.
The Confederation of British Industry (CBI) expects GDP to grow by just 1.2pc this year and 1pc next year, down from the 1.6pc and 1.5pc previously predicted.
Louise Hellem, the CBI's chief economist, suggested the rising cost of employment in the wake of the Chancellor's Budget last October, which has hammered the private sector, had contributed to the downgrade.
She said: 'Those decisions at the autumn Budget to increase taxes on National Insurance contributions alongside the increases in the national living wage have had a material impact on business decisions.
'They have made costs of being in the UK increase and they have meant many businesses have had to make tough choices, particularly on hiring decisions – they are pausing those.'
Ms Reeves's £25bn raid raised the rate of tax employers pay on their workers' wages from 13.8pc to 15pc, and cut the threshold at which the levy kicks in – making it more expensive to hire part-time staff in particular.
Ms Hellem urged the Chancellor to seek ways to make the tax system more efficient instead of raiding businesses yet again in the 2025 Budget scheduled for the autumn, as weak growth raises fears that another black hole will open up in the public finances over the coming months.
Global uncertainty
The CBI also warned that businesses are struggling with Donald Trump's trade war. Exporters are suffering directly from the taxes applied to their sales into the US, while uncertainty is hitting growth in the wider global economy and undermining confidence in investment decisions.
Sustained geopolitical turmoil, including the strikes between Israel and Iran, add to the sense of uncertainty which threatens business investment.
Martin Sartorius, economist at the CBI, said: 'All of these global events lead to a huge amount of volatility in global markets, leading to a more risk-averse mindset, so businesses might be thinking more about whether they want to invest, given currency fluctuations and the interest rate outlook.
'Given how much tariffs have chopped and changed over the last few months, some firms are just saying it is better to scenario plan and to wait and see, because if they suddenly shift their operations from one country to another, maybe they will find out in a day, a week, a month, that tariffs or other restrictions are hitting that location.'
Britain's GDP grew by 0.7pc in the first three months of the year, boosted in part by a surge in exports as American importers sought to bring in goods before tariffs added to their price.
The CBI's economists expect quarterly growth to slow over the course of this year then recover into 2026 as rising wages, slowing inflation and lower interest rates allow households to spend more money.
The analysts predict the Bank of England will cut its base rate from 4.25pc today to 3.5pc in a year's time.
Borrowing rules
The growth forecast downgrade came as Helen Miller, from the Institute for Fiscal Studies, warned the Chancellor that the changes to the borrowing rules 'is not a get-out-of-jail-free card' for extra spending.
Speaking before MPs on Tuesday, she said: 'The fiscal rules are supposed to be a constraint on what you can do – they are not meant to be a target to say we've freed up this space, now let's spend it all.
'We are still borrowing money. That comes with cost, it comes with debt interest costs.'
Ms Reeves changed the fiscal rules last year to allow her to borrow another £50bn, including by changing the targeted measure of public debt to offset financial assets against borrowing. The rules also allow borrowing for investment, but not for day-to-day government spending.
'It matters what you are borrowing for. There is a fiscal rule [which is] trying to be a constraint, it is not a get-out-of-jail free card, it doesn't mean that once you have got that constraint you can always just borrow up to the maximum, spend it on what you like and that is ok,' Ms Miller said.
'You still have to do hard yards of thinking what are you borrowing for, for what purpose, is it a good use of borrowing.'
A Treasury spokesman said: 'We're investing in Britain's renewal through our Plan for Change to make working people better off, and the spending review set out how we'll deliver jobs and growth – including plans to improve city region transport, a record investment in affordable homes and funding Sizewell C.
'We have also secured deals with the EU, US and India to help lower costs for businesses and we have stabilised the public finances helping interest rates to fall four times since July.'