
Rachel Reeves ‘must find £50bn' in tax rises or spending cuts in budget
The National Institute of Economic and Social Research (NIESR) said higher-than-expected public sector borrowing and weaker economic growth had left the chancellor with an 'impossible' choice between cutting spending or raising taxes to balance the books.
Under present estimates, it said, Reeves would need to find £41.2 billion to cover the costs of weaker economic forecasts and tax reversals, plus a further £9.9 billion, if she was to have the same headroom as she had at the time of her last financial statement in March.
Other economists said their projections also suggested that Reeves would have no choice but to 'pull the lever' of increasing income tax, VAT or employee national insurance to cover the shortfall.
This would breach Labour's manifesto commitment to not raise taxes on working people.
NIESR's latest economic outlook also found that the government's fiscal situation had sharply deteriorated since Reeves' statement in March.
It found that total government expenditure was £14.3 billion higher than in the spring. The government's failure to pass its welfare reforms and its U-turn over winter fuel payments further increased spending by £15.2 billion.
It also said that weaker output and employment growth compared with the Office for Budget Responsibility's (OBR) forecast in March implied lower tax revenue and higher welfare payments by 2028-29.
NIESR's estimate for the fiscal shortfall is higher than estimates from City analysts who expect Reeves to face a shortfall of between £20 billion and £25 billion.
However, even at this level the chancellor is likely to be forced to raise one of the main tax rates to make up the shortfall. This is likely to include freezing income rate thresholds for another year, pulling more people into the higher 40 per cent rate of tax.
Stephen Millard, of NIESR, said that Reeves faced an 'impossible trilemma' between breaking her fiscal rules, breaching an electoral promise not to raise taxes on working people or hitting the government's spending targets.
'Can she fill that gap without breaking the manifesto commitment to raising taxes on working people? I think the quick answer to that is no,' he said. 'Fiddling at the edges won't do the job.'
• Should Rachel Reeves raise income tax?
Economists at Deutsche Bank think Reeves faces a narrower £20 billion gap that could be filled by extending the freeze on income tax thresholds beyond 2028 — raising about £7-£10 billion. The government could also announce no real-term spending growth at the end of the decade, raising an additional £5 billion, Sanjay Raja, UK economist at Deutsche Bank, said.
He said: 'With growth at only 1.3 per cent and inflation above target, things are not looking good for the chancellor, who will need to either raise taxes or reduce spending or both in the October budget if she is to meet her fiscal rules.'
Ruth Gregory, chief economist at Capital Economics, said they expected Reeves would miss her targets by up to £25 billion, but the figure could be larger if the OBR downgraded its growth forecasts for the UK economy.
'If the budget deficit is larger than £20 billion, Reeves will have to pull one of the big tax levers like VAT, income tax or employee national insurance to make up the difference,' she said.
'Given that the chancellor decided to increase the tax burden on businesses in the last budget by raising employer national insurance contributions, we would expect that this time the burden will fall on households.'
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