Latest news with #taxincreases
Daily Mail
2 days ago
- Business
- Daily Mail
Labour's 'war-ready' plans will be blown apart by Nato's demand for 3.5% spending on defence and cause £40billion funding shortfall... and tax hikes might be the only way to plug the gap
Voters were warned last night to brace for further tax rises after Nato spending demands blew a £40billion hole in Labour 's plans. Nato chief Mark Rutte has told Keir Starmer and other leaders that the alliance later this month will raise its minimum spending target from 2 per cent of GDP to 3.5 per cent by 2035 to deter Russia 's Vladimir Putin and placate US President Donald Trump. Military sources said it would be 'unthinkable' for Britain to refuse the demand given its leading role in Nato. But experts claimed the bill could eventually run to £40billion a year – the same amount raised by Chancellor Rachel Reeves in her controversial Budget last year and equal to 5p on the basic rate of income tax. Defence Secretary John Healey refused to rule out tax increases to help fund the push to move Britain to a position of 'war-fighting readiness' but said ministers would 'set out how we'll pay for future increases in the future'. The Prime Minister has committed to raising defence spending from 2.3 per cent of GDP to 2.5 per cent by 2027. And he has said the Government will move to 3 per cent at some point in the early 2030s 'subject to economic and fiscal conditions'. But he repeatedly refused to set an 'arbitrary date' for meeting it or set out how it would be funded. Sir Keir was holding emergency talks with advisers in Downing Street about how to respond to the demand. He said this week there were 'discussions about what the contribution should be going into the Nato conference'. This week's Strategic Defence Review said Britain must be ready 'to step up, to lead in Nato and take greater responsibility for our collective self-defence'. Whitehall sources cautioned the Nato target may not have to be met in full for a decade, although intermediate goals could be set along the way. The increased spending demand comes at a time when Ms Reeves is already struggling to meet her own fiscal rules and ministers are in retreat over welfare cuts. The Institute for Fiscal Studies warned 'chunky' tax rises would be needed even to hit 3 per cent spending on defence. Professor Malcolm Chalmers, of the Royal United Services Institute, claimed meeting 3.5 per cent by 2035 would cost an extra £40billion a year and said this was equivalent to raising overall income tax receipts 'by 10 per cent'. Former Army chief Lord Dannatt said: 'I would make the case that we have got to tighten our belt. And if we can't borrow more, which we can't, if we can't grow the economy, which we're struggling to, then we've got to put some taxes up.' Official figures show Labour's current plans would see spending on sickness benefits rise faster than that on defence. Despite planned cuts to disability benefits, spending on sickness and disability is forecast to rise from 2.4 per cent of GDP to 3.1 per cent by the end of the decade, reaching almost £100billion a year by 2030. Former Tory chancellor Jeremy Hunt said yesterday that welfare reform was the 'only way' to square the circle. Mr Rutte is expected to set the minimum defence spending target when Nato leaders gather in The Hague, Netherlands, on June 24. The target will be supplemented with an additional goal of spending 1.5 per cent on security- related activity, taking the total to the five per cent demanded by Mr Trump. But former Nato chief Lord Robertson warned that many countries would struggle if the aims are set too high. The Labour peer, who led the Government's review, said: 'I can see why Nato is giving targets but whether they are realisable is a different question altogether.'
The Independent
3 days ago
- Business
- The Independent
Starmer warned of need for ‘chunky tax rises' to pay for new military spending
Sir Keir Starmer has been warned he will need to make 'really quite chunky tax increases' to pay for his plans to increase defence spending. The Prime Minister said he was '100% confident' cash would be available for all plans laid out in the new strategic defence review, which includes extra attack submarines, £15 billion on nuclear warheads and thousands of new long-range weapons. The Government has promised to increase defence spending to 2.5% of gross domestic product (GDP) by 2027, and has an ambition – but no firm commitment – to hike it to 3% in the next parliament. Paul Johnson, the director of the Institute for Fiscal Studies (IFS) think tank, warned the Government faces tough financial choices over the plans, as it also grapples with other key areas of public spending. He told Times Radio: 'It looks like the Government wants to reinstate the winter fuel payment. It's thinking about the two-child limit for benefits. We've got a spending review next week. 'And if we are really going to spend another £10-£15 billion a year on defence, whilst inevitably we're going to spend more and more on health and pensions and so on, you really do have to ask that question, what are the choices that you're going to make?' Mr Johnson added: 'I mean, bluntly, it really does seem to me that the only choice that is available, if we're going to go through all of those things, is some really quite chunky tax increases to pay for it. 'But of course, that's not something the Prime Minister or the Chancellor is willing actually to say.' Sir Keir earlier declined to rule out another raid on the aid budget to fund increased defence spending, and signalled he was hopeful that the extra investment could be supported by a growing national economy. The Prime Minister was asked to say that he would not go back to the budget in search of funds to meet his 3% goal, as he set out his plans during a visit to Glasgow. He replied: 'On the aid budget, it was a difficult decision that we had to take in order to get to 2.5% and I am absolutely clear that in the meantime we have to ensure that we do other work on aid, working with other countries, other institutions, to pull levers to trigger the money that we need for aid. 'But the best way to pay for increase in any public spending is to grow our economy. And that is the focus when it comes to defence or any other spending – wealth creation.' Mr Johnson however warned that 'very poor levels of economic growth' meant the Government had 'some really, really tough choices to make'. The Prime Minister also said the terms of the strategic defence review had been set 'on the premise that we will be spending 2.5% of GDP on our defence'. He added: 'Obviously, since then, what we've done is then put the date on that – 2027-2028 – the highest sustained increase in defence spending since the Cold War, a date I think that was earlier than some people thought it would be, but also set out that ambition to hit 3% in the next parliament. 'So I'm 100% confident that this can be delivered because that was baked in from the very start of the review as one of the first conversations we had with the reviewers.'
Yahoo
25-05-2025
- Business
- Yahoo
Labour is pioneering the Blackadder approach to public finances
After Labour took office in July 2024, ministers talked relentlessly about 'finding a £22bn black hole in the public finances on entering office'. It was a cynical, deeply misleading narrative, used to justify hefty tax rises unveiled by Rachel Reeves, the Chancellor, in her October Budget but omitted from Labour's election manifesto. For the 'black hole' was, according to Paul Johnson of the Institute of Fiscal Studies (IFS), probably the UK's most respected analyst of our national accounts, 'obvious to anyone who dared look'. Labour deliberately ignored fiscal reality to serve its own political ends – a governing strategy the party now looks set to test to destruction. During the second half of 2024, the Government's endlessly downbeat 'black hole' rhetoric and tax increases hammered business and consumer sentiment, stopping economic growth in its tracks as GDP flatlined. The 0.7pc GDP uptick during the first three months of this year was a chimaera – driven above all by a 4pc surge in exports ahead of President Donald Trump's expected move to raise tariffs on goods sold in the US. The UK economy is dangerously fragile. Inflation soared to 3.5pc during the year to April, up from 2.6pc the previous month, as firms passed on Reeves's £25bn annual rise in employer National Insurance contributions (NICs) and a hefty increase in the minimum wage. That's getting on for twice the Bank of England's 2pc target, ruling out any more interest rate cuts for some months. That same NIC rise, introduced last month, meant April should have been a bumper month for tax receipts. But Labour's inflation-busting public sector pay rises and soaring welfare payments saw the Government take on £20.2bn of extra debt last month alone. Meanwhile, borrowing for the financial year ended March was £148bn – a cool £11bn more than the Office for Budget Responsibility (OBR) forecast just weeks ago in Reeve's 2025 Spring Statement. And it's an astonishing £61bn more than the watchdog's estimate back in March 2024. UK government spending has long outstripped the economy's ability to generate tax revenues, as massive annual borrowing totals add to our growing stock of national debt. The last time we ran an annual budget surplus was in 2000/01, almost a quarter of a century ago. Each year, the OBR pretends borrowing will be much lower than it actually will be – then the media fails to compare current outcomes with previous estimates, focussing instead on the political drama of future forecasts. This result is a collective obsession with ideological narrative over fiscal reality. Between 2010 and 2019, for instance, the UK's national debt ballooned from 50pc of GDP to 80pc – a period absurdly dubbed 'the austerity years'. In her Spring Statement, Reeves boasted about £9.9bn of 'headroom' she had allowed for on total spending of £1,351bn in four years' time – a contingency of well below 1pc, so small as to be meaningless. Yet she was dubbed 'the Iron Lady'! That contingency has now completely gone, in part because financial markets, alarmed at Labour's high spending, have pushed up gilt yields and, therefore, debt service costs. No less than £9bn of the £20bn borrowed last month was spent on debt interest. The annual debt service bill is now a grotesque £105bn – more than the state spends on transport and schools combined. But the main reason Reeves's 'headroom' vaporised is that growth has slowed, resulting in weaker tax receipts, and Labour's tax rises will compound the problem by slowing growth even more. The Bank of England's growth forecasts during this parliament are lower than those of the OBR, starting with 0.75pc this year, compared to a 1pc 2025 forecast from the official fiscal watchdog. If the Bank is right, Reeves's £9.9bn of headroom in four years' time turns into a £30bn shortfall, according to calculations by Elgin Advisory, a risk consultancy. Such concerns about Labour's big-borrowing, growth-sapping tendencies are increasingly evident on government debt markets. Over the last nine months, the Bank of England has dropped base rates a full percentage point from 5.25pc to 4.25pc. But long-term government borrowing costs have moved a similar amount in the opposite direction, with the 30-year gilt yield surging from 4.35pc in the run-up to Reeves's October budget to 5.55pc now. Markets and policymakers are at loggerheads, which spells looming systemic danger as the markets always win. For months, long-term borrowing costs have been above their peak during the October 2022 'mini-Budget' crisis – so where is the media outcry? Within investor circles, there is now open talk of a potential 'gilts strike' – with the Government only able to borrow at very sharply elevated interest rates – or even a 1976-style insolvency crisis. We're not there yet, but the dangers are very real. While the 'bond vigilantes' are starting to inflict pain around the world, with US and Japanese long-term yields rising, the UK is heavily exposed, lacking the 'reserve currency' might of America and with a lot of our debt held by overseas investors. Plus, a third of our government debt is index-linked – so as inflation rises, the balance sheet squeeze is punishing. 'If nothing else works, a total pig-headed unwillingness to look facts in the face will see us through'. So said General Melchett in that television comedy classic Blackadder, played by Stephen Fry. That's Labour's approach to managing our public finances – but it's anything but funny. The UK is crying out for economic leadership – in the form of fiscal discipline, lower taxes and other supply-side measures to deliver the growth needed to rescue our public finances. But, like General Melchett, this Government – and much of our political and media class in fact – is determined not to 'look facts in the face'. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.
Telegraph
25-05-2025
- Business
- Telegraph
Labour is pioneering the Blackadder approach to public finances
After Labour took office in July 2024, ministers talked relentlessly about 'finding a £22bn black hole in the public finances on entering office'. It was a cynical, deeply misleading narrative, used to justify hefty tax rises unveiled by Rachel Reeves, the Chancellor, in her October Budget but omitted from Labour's election manifesto. For the 'black hole' was, according to Paul Johnson of the Institute of Fiscal Studies (IFS), probably the UK's most respected analyst of our national accounts, 'obvious to anyone who dared look'. Labour deliberately ignored fiscal reality to serve its own political ends – a governing strategy the party now looks set to test to destruction. During the second half of 2024, the Government's endlessly downbeat 'black hole' rhetoric and tax increases hammered business and consumer sentiment, stopping economic growth in its tracks as GDP flatlined. The 0.7pc GDP uptick during the first three months of this year was a chimaera – driven above all by a 4pc surge in exports ahead of President Donald Trump's expected move to raise tariffs on goods sold in the US. The UK economy is dangerously fragile. Inflation soared to 3.5pc during the year to April, up from 2.6pc the previous month, as firms passed on Reeves's £25bn annual rise in employer National Insurance contributions (NICs) and a hefty increase in the minimum wage. That's getting on for twice the Bank of England's 2pc target, ruling out any more interest rate cuts for some months. That same NIC rise, introduced last month, meant April should have been a bumper month for tax receipts. But Labour's inflation-busting public sector pay rises and soaring welfare payments saw the Government take on £20.2bn of extra debt last month alone. Meanwhile, borrowing for the financial year ended March was £148bn – a cool £11bn more than the Office for Budget Responsibility (OBR) forecast just weeks ago in Reeve's 2025 Spring Statement. And it's an astonishing £61bn more than the watchdog's estimate back in March 2024. UK government spending has long outstripped the economy's ability to generate tax revenues, as massive annual borrowing totals add to our growing stock of national debt. The last time we ran an annual budget surplus was in 2000/01, almost a quarter of a century ago. Each year, the OBR pretends borrowing will be much lower than it actually will be – then the media fails to compare current outcomes with previous estimates, focussing instead on the political drama of future forecasts. This result is a collective obsession with ideological narrative over fiscal reality. Between 2010 and 2019, for instance, the UK's national debt ballooned from 50pc of GDP to 80pc – a period absurdly dubbed 'the austerity years'. In her Spring Statement, Reeves boasted about £9.9bn of 'headroom' she had allowed for on total spending of £1,351bn in four years' time – a contingency of well below 1pc, so small as to be meaningless. Yet she was dubbed 'the Iron Lady'! That contingency has now completely gone, in part because financial markets, alarmed at Labour's high spending, have pushed up gilt yields and, therefore, debt service costs. No less than £9bn of the £20bn borrowed last month was spent on debt interest. The annual debt service bill is now a grotesque £105bn – more than the state spends on transport and schools combined. But the main reason Reeves's 'headroom' vaporised is that growth has slowed, resulting in weaker tax receipts, and Labour's tax rises will compound the problem by slowing growth even more. The Bank of England's growth forecasts during this parliament are lower than those of the OBR, starting with 0.75pc this year, compared to a 1pc 2025 forecast from the official fiscal watchdog. If the Bank is right, Reeves's £9.9bn of headroom in four years' time turns into a £30bn shortfall, according to calculations by Elgin Advisory, a risk consultancy. Such concerns about Labour's big-borrowing, growth-sapping tendencies are increasingly evident on government debt markets. Over the last nine months, the Bank of England has dropped base rates a full percentage point from 5.25pc to 4.25pc. But long-term government borrowing costs have moved a similar amount in the opposite direction, with the 30-year gilt yield surging from 4.35pc in the run-up to Reeves's October budget to 5.55pc now. Markets and policymakers are at loggerheads, which spells looming systemic danger as the markets always win. For months, long-term borrowing costs have been above their peak during the October 2022 'mini-Budget' crisis – so where is the media outcry? Within investor circles, there is now open talk of a potential 'gilts strike' – with the Government only able to borrow at very sharply elevated interest rates – or even a 1976-style insolvency crisis. We're not there yet, but the dangers are very real. While the 'bond vigilantes' are starting to inflict pain around the world, with US and Japanese long-term yields rising, the UK is heavily exposed, lacking the 'reserve currency' might of America and with a lot of our debt held by overseas investors. Plus, a third of our government debt is index-linked – so as inflation rises, the balance sheet squeeze is punishing. 'If nothing else works, a total pig-headed unwillingness to look facts in the face will see us through'. So said General Melchett in that television comedy classic Blackadder, played by Stephen Fry. That's Labour's approach to managing our public finances – but it's anything but funny. The UK is crying out for economic leadership – in the form of fiscal discipline, lower taxes and other supply-side measures to deliver the growth needed to rescue our public finances. But, like General Melchett, this Government – and much of our political and media class in fact – is determined not to 'look facts in the face'.
Telegraph
08-05-2025
- Business
- Telegraph
Reeves tax raid to blow £57bn black hole in Britain's finances
Rachel Reeves's record tax increases have derailed the economy and threaten to blow a £57bn hole in public finances, analysts have warned. The Chancellor's plans have hammered business confidence and undermined growth far more than Donald Trump's trade war, according to the National Institute of Economic and Social Research (NIESR). Rising inflation meanwhile limits the Bank of England's ability to cut interest rates to support growth. Benjamin Caswell, an economist at NIESR, said the combination meant Ms Reeves risked being forced to raise taxes again in the autumn to repair public finances. It represents a fresh blow to the Chancellor's claim that the US president's tariffs are to blame for Britain's weakening economy. The International Monetary Fund has also said Ms Reeves is the main cause of the UK's downturn. The Washington body recently said 'domestic factors are probably the biggest ones' in motivating its recent downgrade to growth forecasts. NIESR said the US president's trade war was expected to knock 0.1 percentage points off Britain's growth this year but damage from Labour's tax increases and the fear of more to come was doing more harm. Mr Caswell said: 'Tariffs have engendered a lot of uncertainty, but I don't think that should take the Government off the hook. There has been a lot of uncertainty engendered through the spring statement and through some of the Budget measures.' The economy is forecast to grow by 1.2pc this year, NIESR predicted, down from its previous projection of 1.5pc. Growth will also be weaker in almost every year for the rest of this decade. Companies fear another round of tax increases in the autumn, Mr Caswell said, which is 'holding back the economy'. 'Firms are basically playing a wait-and-see game,' he said. 'They are scaling back capital expenditure and hiring, vacancies have fallen very dramatically.' Mr Caswell added: 'Because of the weaker economic outlook, we project lower tax receipts, and because of the lower tax receipts, we think the Government is not going to meet either of its fiscal rules.' NIESR predicted Ms Reeves would miss her rule to pay for day-to-day spending with tax receipts by £57.1bn. Meanwhile, the Chancellor is set to fall £24.9bn short of her aim to reduce net financial debt as a share of GDP. Mr Caswell said this would force the Chancellor to cut spending or increase taxes if she wishes to stick to the 'iron clad' rules, which she created last year. He suggested that Ms Reeves could reverse tax cuts made by Jeremy Hunt, her Conservative predecessor, to fill some of the hole. 'The two National Insurance contributions cuts under Hunt cost about £10.7bn each until 2028-29 according to the Office for Budget Responsibility, so reversing them would make a reasonable dent in the deficit.' However, he added: 'The balancing act is made even more complicated because, in the manifesto, there was a pledge not to raise taxes on working people.' It comes a week after bruising local elections in which Labour lost almost 200 councillors, and suffered defeat in the Runcorn & Helsby parliamentary by-election to Reform. The results have led to a backlash among Labour MPs, with mounting pressure for a change of tack on key policies including last year's decision to end universal winter fuel payments to pensioners. NIESR said the Bank of England will only be able to offer limited cuts to interest rates to support the economy. That is because inflation is rising on the back of Ms Reeves's heavy spending and borrowing, and due to the impact of her policies, including higher national insurance contributions and the increased minimum wage. Inflation will peak at 3.7pc later this year and only return to the Bank of England's 2pc target in 2027 as tax rises and sustained high pay increases push up prices, the institute forecast. The Bank of England's Monetary Policy Committee, led by Andrew Bailey, the bank's Governor, is expected to cut rates from 4.5pc to 4pc this year, then to 3.75pc next year, on the analysts' forecasts. 'It is wise for the Bank to remain cautious,' said Mr Caswell. 'Cutting too aggressively and then having to reverse course later, were additional inflationary pressures to materialise, would be more disruptive given the fragile outlook that the UK economy faces.' Mel Stride, the shadow chancellor, said: 'The Chancellor is playing fast and loose with the public finances. She should have learned lessons after she was forced into an emergency budget in March. Now she is once again teetering on the edge of breaking her own fiscal rules. 'This inevitably means rising speculation about further painful tax rises come the autumn - all at a time when businesses are in desperate need of certainty, and households are worried about rising bills.' A Treasury spokesman said: 'This government's commitment to meeting our fiscal rules is iron clad. We saw what happens when governments play fast and loose with the public finances - it's working people who pay the price. 'We delivered a once in a Parliament budget to fix the public finances and rebuild the NHS, with 2m additional appointments and waiting lists falling five months in a row, whilst protecting working people's payslips from tax rises. Now we we're going further and faster for growth, delivering our number one mission to put more money in working people's pockets through our Plan for Change.'
