National Institute of Economic and Social Research says Rachel Reeves’s plans have undermined business confidence – AFP/Yui Mok
Rachel Reeves’s record tax increases have derailed the economy and threaten to blow a £57bn hole in the 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.”
0805 Reeves has no room to breathe
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.”
