The chancellor may be forced to raise taxes at the Autumn Budget to keep within her borrowing rules, industry experts have warned.
In today’s Spending Review, Rachel Reeves unveiled major increases in public funding – from £14.2bn for nuclear infrastructure and £15.6bn in regional transport, to a £39bn affordable housing package and restoring winter fuel payments.
The government is also committing to raise defence spending from 2.3% to 2.5% of GDP by 2027-28, with suggestions it could eventually rise to 3%.
At the same time, ministers are talking up “big increases” in capital investment for schools, hospitals and roads.
However, as a result, industry figures believe significant tax rises are now inevitable in the coming months.
Stephen Millard, interim director of the National Institute of Economic and Social Research (NIESR), said: "The Chancellor has yet again said that her fiscal rules are ‘non negotiable’. But, given the small amount of headroom at the time of the Spring Statement and the increases in spending announced since then, it is now almost inevitable that if she is to keep to her fiscal rules, she will have to raise taxes in the Autumn Budget.”
Nigel Green, CEO of deVere Group, agreed: “Reeves is spending money she hasn’t got — and the tax reckoning will come this autumn.
“There’s simply no other path. The UK is already heavily taxed, growth is flat, borrowing costs are high, and the global appetite for gilts is thinning. The Autumn Budget is where the axe will fall.”
Robert Salter, director at Blick Rothenberg, commented: “Given the size of the Government’s planned spending increases, significant tax rises are inevitable in the coming months. The increase in the Defence budget of ca. £11bn per annum is on its own equivalent to an increase of approximately 1.5p on the basic rate of income tax.
“The focus on increasing energy capacity and energy provision is very welcome. However, there is a risk that the costs of these major nuclear and carbon capture and storage facilities will significantly overrun, and that delivery deadlines are missed. This has happened in the past with other major UK energy infrastructure products, and the Government must ensure history does not repeat itself again.
“Finally, while Rachel Reeves talked consistently in her Spending Review about economic growth, economic security and the importance of these issues for workers, many measures that the Government have previously announced, such as the increase in employer’s National Insurance Contributions (NIC) have actually increased unemployment.”
Lindsay James, investment strategist at Quilter, added: "Investors have been growing increasingly cynical about government spending plans and fiscal rules. We’ve witnessed a cycle of reduced growth forecasts from the OBR, for all sorts of reasons including some that are outside the government’s control. Shrinking fiscal headroom, leading to a round of tax increases and spending cuts has caused a growth slowdown, pushing a balanced budget even further out of reach.
“Since March we’ve seen the economy hit by the impact of these tax rises. Jobs data out this week showed that payrolled employee numbers fell by a staggering 274,000 year on year, while growth forecasts have been cut for this year and next. Certainly, concern around export tariffs have been a factor, but an increased tax burden is another.
“The high level of uncertainty around the next autumn budget, including what the shortfall will be and how it will inevitably be filled with tax rises, has also been weighing on growth. Yet the pressure to increase spending has continued, and today’s spending review will have done little to quell fears that further tax rises are still to come.
“While the Chancellor laid out her plans to spend, it's not clear where any cuts will come from. For example, a 3% real terms commitment to the NHS implies real terms cuts will be needed elsewhere, yet there was simply no mention of this."
