26-05-2025
Labour giveaways risk sparking £30bn tax raid
Rachel Reeves is being forced towards a tax raid of up to £30bn by benefit giveaways and her struggle with rising borrowing costs.
Experts fear higher taxes are now inevitable after Labour pledged to restore winter fuel payments and review the two-child benefit cap, piling costs on the beleaguered Chancellor.
The growing pressure risks driving the Government to break a manifesto pledge not to increase income tax, National Insurance and VAT, economists warned.
Stephen Millard, acting director of the National Institute of Economic and Social Research (NIESR), said: 'It is pretty much inevitable now that she will have to raise one of those big taxes.'
Mr Millard said the amount the Chancellor will be forced to raise could range anywhere from £10bn to £30bn.
It follows record tax increases of £40bn by Ms Reeves last year, which the Chancellor has promised not to repeat.
Mel Stride, the shadow chancellor, said Ms Reeves was 'out of her depth', adding: 'Rachel Reeves, our tin foil Chancellor, has folded at every turn – rewriting fiscal rules and then constantly teetering on the edge of breaking them, while at the same time fuelling speculation over welfare U-turns.'
Looming costs
Ms Reeves left herself only a wafer-thin margin of error of £9.9bn at the Spring Statement against her fiscal rules. Around £4.4bn of this buffer has already been wiped out by Donald Trump's trade war pushing up borrowing costs, according to Capital Economics.
Meanwhile, Sir Keir Starmer last week bowed to pressure from backbenchers and abandoned steep cuts to pensioners' winter fuel payments, an about-turn that will cost the Treasury up to £1.5bn.
The Prime Minister is also understood to be pushing for the abolition of the two-child benefit cap, which experts widely blame for a rise in child poverty, potentially costing a further £3.5bn by the end of the decade.
Public sector pay deals will cost the Treasury around £2bn more than previously budgeted for, although the Government intends to try to make departments offset this with savings elsewhere.
A crackdown on migration will also plunge the Chancellor £7bn further into the red against her fiscal rules, previous analysis by the fiscal watchdog suggests.
The combined cost to the Treasury stands at more than £18bn, with the risk of another blow if the Government's fiscal watchdog downgrades estimates for productivity growth that are widely regarded as over-optimistic.
Ms Reeves will come under heavy pressure from her own party to fill the gap with tax rises rather than spending cuts. Last week The Telegraph disclosed a leaked memo by Angela Rayner, the Deputy Prime Minister, calling for a raft of tax increases on higher earners and the wealthy. Treasury figures on Monday sought to cast doubt on Ms Rayner's maths, suggesting she had overestimated how much could be raised by the tax grab.
Richard Tice, deputy leader of Reform UK, said: 'Labour has lost control of the economy, mainly due to Reeves's wild public sector pay rises. More taxes will ruin what's left of the economy and more entrepreneurs are leaving her car crash by the week.'
Productivity problems
Ms Reeves is in danger of a further blow when the Office for Budget Responsibility (OBR) next assesses the UK's productivity, potentially forcing her to raise taxes even further. A downgrade to its productivity forecasts would mean the economy is projected to grow more slowly than currently expected, decreasing the predicted tax take.
Figures from the Office for National Statistics (ONS) on Friday showed that the private sector is 0.7pc less productive than it was before the pandemic, in a development that is unlikely to help the Chancellor. Even a 0.1 percentage point cut a year to productivity forecasts from 2025 to 2029 could knock £10bn off the fiscal headroom.
Yael Selfin, chief economist at KPMG, said: 'The OBR assumption of longer-term productivity is relatively optimistic. It is possible that they may decide to revise that assumption downward, in which case there'll be less fiscal room.'
'Iron-clad' fiscal rules
Ms Reeves will hope that trade deals with the EU, India and the US will help buy her back some breathing room.
But if the Chancellor is tens of billions of pounds in the red by autumn, she must choose between tax rises, spending cuts or tweaking her fiscal rules.
Loosening Ms Reeves's 'iron-clad' fiscal rules would threaten another gilt meltdown pushing up borrowing costs, if bond vigilantes sense the Chancellor's discipline is slipping.
Britain's tax burden is already at a 75-year high, after the Chancellor raised taxes by a record £40bn last autumn.
In a further headache for the Chancellor, the Government's borrowing for the year ending in March overshot OBR forecasts by £11bn.
A Treasury spokesman said: 'The fiscal rules are non-negotiable. We put them in place to create stability and support investment and have seen what happens when fiscal rules are put to one side.
'We are delivering growth built on strong and secure foundations through our Plan for Change, and we've seen the fastest economic growth in the G7 in the opening quarter of the year. At the same time, we're also protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of Income Tax, employee National Insurance or VAT.'
