Taxes will have to rise further despite Reeves’ £40bn tax grab, IFS director warns

Rachel Reeves will have to raise taxes further in the coming years despite her Budget on Wednesday containing £40bn of tax increases, a top economist has warned.

The chancellor has pencilled in spending plans almost as implausible as her predecessor Jeremy Hunt, according to the head of the Institute for Fiscal Studies (IFS).

Rachel Reeves has hit back at criticism, insisting that public services in the UK “needed an immediate injection of cash” and pointed out that the International Monetary Fund (IMF) has backed her Budget.

She said: “I do own the decisions I took yesterday. They were the right ones to protect public services and the standard of living of people in this country. I had to make difficult choices but that was necessary to start to rebuild our country.”

But IFS director Paul Johnson said he would bet “an awful lot” that Ms Reeves will have to boost spending further at future Budgets to appease her cabinet colleagues.

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“That will probably mean, unless she gets lucky with growth, more tax rises to come next year or the year after,” he told BBC Radio 4’s Today programme.

However, the International Monetary Fund (IMF) was supportive of the Budget, with a spokesman welcoming the increase in investment and spending on public services as well as “sustainable” tax rises.

But Mr Johnson’s comments came after Ms Reeves faced a major setback, with the Office for Budget Responsibility (OBR) downgrading the UK’s growth forecasts.

The independent spending watchdog said the Budget would boost economic growth in 2024 and 2025 compared with its last forecasts in March. But after that it downgraded its expectations to 1.8 per cent in 2026 (down from 2 per cent), 1.5 per cent in 2027 (down from 1.8 per cent), and 1.5 per cent in 2028 (down from 1.7).

Mr Johnson said: “The growth forecasts are pretty awful, there is a bit of an increase in the first year or two… but go two or three years out then there is a great big tax rise in there which is going to reduce people’s incomes, and the OBR says the increases in borrowing and so on are going to increase interest rates.”

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Ms Reeves hit back at criticism of her Budget, saying that over the coming five years the overall amount of economic growth expected remains unchanged from March’s forecasts.

And she promised that changes made by the Labour government would mean higher growth beyond the OBR’s five-year forecasts.

The chancellor told Sky News: “The growth numbers yesterday are not the summit of my ambition.

“We are less than four months into this new government… I want growth to be stronger and to be faster.”

OBR chair Richard Hughes said parts of the chancellor’s Budget will boost the economy, such as extra investment, but warned it “takes time to come on stream”. And he warned there are parts of the Budget which will hold back the economy, such as Ms Reeves’ hike in employer national insurance contributions.

Mr Hughes added that extra government investment "crowds out" the private sector and warned that the cost of borrowing will go up.

And he said: "Interest rates are going to be higher, how that translates into mortgages depends on the banks."

It came after Ms Reeves used Labour’s first Budget in 14 years to push a £40bn tax hike and £32bn borrowing spree in what she said was a plan to “fix broken Britain”.

She announced a string of measures targeting the wealthy and the middle class, including:

Ms Reeves said the tax rises will help to pay for an extra £25bn cash injection for the NHS, part of an overall spending increase of £70bn.

Jeremy Hunt appeared to suggest that Ms Reeves’ Budget was even worse than Liz Truss’ mini Budget or any other in the last five decades.

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He told the Today Programme: "These tax rises represent the biggest assault on our economic competitiveness since the 1970s."

The former chancellor described Ms Reeves’ claims that he left a £22 billion black hole in the public finances as "fictitious" and pointed out that her tax rises were almost double that at £40 billion.

He said: "This was a choice Rachel Reeves made." The OBR has also said it does not recognise the £22bn figure.

In an analysis of the Budget published on Thursday, the Resolution Foundation think tank said Ms Reeves has pencilled in brutal cuts to government departments that could see their funding cut back to 2015 levels by the next general election.

Interim chief executive Mike Brewer said: “With Britain finally turning the page on its longstanding failure to invest thanks to a £100 billion boost to public capital spending, the hope is that this short-term pain will eventually turn into a long-term living standards gain.

“But if it doesn’t, future Budgets won’t be any easier to deliver, especially if further tax rises are needed.”

Sir Nigel Wilson, chairman of the Canary Wharf Group, said: "Basically it is a very traditional Labour Budget, a huge increase in public spending and tax on individuals and there is no private sector analysis in the Budget. It is the private sector who is going to drive economic growth."

He said that the Budget "stepped backwards in terms of economic growth and money in people’s pockets."

He urged the government to detail where it is going to use £1 trillion of investment to drive economic growth.