Rachel Reeves will have no choice but to break her manifesto pledge and raise taxes

Telegraph

19-03-2025

The Spring Statement the Chancellor will deliver on March 26 will no doubt be politically difficult.
Having promised stability, growth and increased investment, she faces the humiliation of cutting spending to austerity levels and having the Office for Budget Responsibility downgrade its short term growth forecasts.
On top of that, balancing the books by cutting welfare, public spending and international aid will be too much for some Labour MPs who will start publicly criticising her entire economic agenda. But if she is hoping to ride out a difficult few weeks, make some tough decisions, and then reap the rewards at a later date, then I've got some bad news: this fiscal event is a sideshow compared to the economic and political reckoning that the Government will face in the autumn.
Tuesday's welfare reforms and the rumoured spending cuts are just tinkering around the edges to meet the fiscal rules. And the spending cuts will also only be implemented in the later years of this parliament. So in the immediate term there will be a political battle with the Left but no real-world impact.
However, by the time of the next Budget, the consequences of the tax rises Reeves has already announced, the impact of global tariff increases and mounting evidence about the state of the UK economy will mean the OBR is likely to downgrade its forecasts for long run economic productivity.
This would be catastrophic for the Chancellor but more importantly for families and businesses up and down the country.
Why? Well, at the moment the Office for Budget Responsibility (OBR) is predicting that trend productivity growth will rise to 1.25pc in 2029 from 0.2pc last year. The average over the last decade, though, has been just 0.66pc. And most other economists think the OBR is far too optimistic in this regard.
So a cut to this significant driver of growth is absolutely on the cards – and only a slight trim is needed to do real damage to the forecasts.
As the OBR themselves have said, a 0.5 percentage point reduction in productivity forecasts would increase borrowing by a massive £40bn a year.
So just by basing their forecasts on the average productivity rates seen over the last decade the Government would blow a real black hole in their plans – one twice the size of the made up one they used to justify the rise in employers' National Insurance last autumn.
If this was happening, surely we would have heard about it by now? In fact, traditionally the OBR looks at productivity forecasts over the summer in time to inform an autumn fiscal event.
Assuming then that the Chancellor has already cut spending and welfare below levels that most of the parliamentary Labour Party are comfortable with, and assuming she holds fast to the one remaining shred of credibility she has left and sticks to her fiscal rules, this can only mean one thing: tax rises. And lots of them.
This is obviously the last thing the country needs. But I am struggling to see an alternative scenario. Does anyone really think that economic growth is going to pick up over the course of this year as tax rises bite and a global trade war starts?
Is long term productivity going to shoot above the already optimistic OBR forecast? And with Donald Trump's shaky commitment to the defence of Europe, does anyone think that we won't have to move to 3pc of GDP on defence spending sooner rather than later? All of this means the build up to the Spring Statement will feel like a walk in the park compared to the fiscal position the Chancellor will be grappling with in the autumn.
We have been told to expect the OBR to downgrade growth for the next couple of years in its spring forecast. But, relatively speaking, that will have little impact on the fiscal picture.
What will really hurt the Chancellor in a few weeks will be lower tax receipts and higher government borrowing costs than previously anticipated. Even so, this combination would cost only around £10bn in headroom, not the £40bn that a downgrade in trend productivity could cause.
Tax rises of the scale we saw in October would be needed to mitigate the impact. And we all know the damage those have done to the economy. But by pressing ahead with these tax rises, rather than cancelling them in full and controlling public spending and welfare accordingly, the Chancellor is ensuring that we stay firmly in a high tax and high spending spiral.
I see no sign that she has the political will that is needed to break us out of this painful loop. So however difficult and dramatic this month's fiscal event seems, I fear the autumn Budget will be far, far worse. For the Chancellor, this could be politically terminal. I just hope that isn't the case for the economy as a whole.