Rachel Reeves warned up to £25bn of tax rises needed to avoid austerity
Rachel Reeves’ first budget could be ‘the most consequential since at least 2010’, the IFS said
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Your support makes all the difference.Warnings are ramping up ahead of Rachel Reeves’ first budget on October 30, with the Institute for Fiscal Studies (IFS) indicating that the chancellor may need to raise up to £25 billion from tax rises in order to avoid a return to austerity.
The IFS warned that a change to the borrowing rules, which is being considered by the Treasury, would do “almost nothing” to ease the challenge of funding public services.
Ms Reeves, who has promised to meet day-to-day spending out of revenues, would still need to turn to tax rises to avoid spending cuts and meet her pledge to borrow only to invest.
The chancellor has warned that “tough decisions” will be taken at the budget but denied that the country will see a return to austerity.
The latest warning comes amid wider concerns that Ms Reeves’ prospective plan to overhaul the fiscal regime to unlock £50bn of extra spending could spook the markets and trigger a Liz Truss-style meltdown.
While No 10 has insisted it will “absolutely deliver” on its pledge to restore economic stability, financial experts warned the plans could trigger investor backlash.
Nigel Green, chief executive of deVere group – one of the world’s largest independent financial advisory organisations – pointed out that in the weeks leading up to the Budget UK gilt yields – widely seen as a barometer of investor confidence – have increased from 3.75 per cent to around 4.2 per cent.
He told The Independent: “This rise, a clear signal that investors are offloading government debt, indicates growing concerns that the chancellor may prioritise fiscal stimulus over long-term sustainability.”
“If Reeves doesn’t tread carefully, we could see a repeat, albeit to a lesser degree, of the panic that followed Truss’s mini-Budget”, Mr Green added.
Ms Truss sparked gilt market freefall and a run on sterling after introducing unfunded tax cuts in her 2022 mini-Budget.
But the prime minister’s official spokesperson rejected claims that the government’s plans would trigger uncertainty in the markets.
Asked whether the fiscal rules set out in the Labour manifesto would stay in place after the Budget amid suggestions a change could spark Truss-style chaos, the prime minister’s official spokesperson said: “Obviously, I wouldn’t accept that characterisation.
“The government has made clear that one of the first steps of this government is to restore economic stability in the Budget. It will absolutely deliver on that, delivering on the robust fiscal rules that were set out in the manifesto.”
In the IFS’s Green Budget report, director Paul Johnson said Ms Reeves’ first budget could be “the most consequential since at least 2010”.
The report, funded by the Nuffield Foundation and using economic forecasting by Citi, concluded that if there are no cuts to spending outside of public services, Ms Reeves would need a tax rise of £16 billion to remain on course to balance the budget in 2028-29.
This would be on top of the £9 billion tax rise from measures set out in Labour’s manifesto – adding up to almost £25 billion in total.
But the party’s pledges not to raise income tax and corporation tax or to increase National Insurance or VAT mean she may struggle to implement a tax rise on that scale.
On Wednesday, Sir Keir Starmer declined to say whether his pre-election promise not to raise National Insurance applied to both employee and employer National Insurance payments, with his spokesperson later refusing to rule out increasing national insurance on businesses.
Despite the warnings, Benjamin Nabarro, chief UK economist at Citi, said there were “cautious reasons for optimism” in the economic forecast and that there is a notable opportunity for structural reform.
“Unfortunately, large outstanding debt stocks and a current account deficit mean the UK faces budget constraints that many other advanced economies don’t. Additional borrowing may therefore have to be used sparingly and reform used creatively”, he added.
A Treasury spokesman said: “It’s right to say that we have inherited a tough financial position, but we won’t let the challenges of the past define our future.
“Despite uncovering a £22 billion black hole in our public finances we are focused on making this the most pro-growth Treasury in history, built on the rock of economic stability, including robust fiscal rules that were set out in the manifesto.
“That is how we will fix our public services and deliver on the promise of change.”
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