IFS says further tax rises may be needed

The extent to which Rachel Reeves and Keir Starmer have painted themselves into a corner has become clearer today with claims by the Institute for Fiscal Studies that Labour could need £9bn of further tax increases to avoid a fresh round of austerity for some struggling public services. This is despite their first budget setting out the largest tax rise in a generation.

The Guardian reports that the leading experts in public finances believe she could be forced to top up her tax plans to avoid real-terms cuts in some areas, including councils, the justice system and prisons:

The IFS said that while Reeves had provided a substantial short-term funding boost to unpick “unrealistic” Conservative plans, she had pencilled in cuts to unprotected departments after the next financial year that were more than likely to need revisiting.

Paul Johnson, the director of the IFS, warned that Reeves’s £40bn tax-raising budget would mainly go towards steadying the government finances rather than paving the way for big improvements in public services.

He said the chancellor was gambling that either a short-term splurge in public spending could clear backlogs in the system, helping to bring down future costs, or could be hoping for stronger economic growth to bail the government out. “[But] if nothing else changes in the forecasts, particularly if we continue not to increase petrol duties, I think other taxes will likely have to rise,” he said.

Saying the spending plans amounted to “pretending” that Labour would splurge in the early years before reining in spending in future, he said: “That’s not going to happen. The spending plans will not survive contact with her cabinet colleagues.”

“I am willing to bet a substantial sum that day-to-day public service spending will in fact increase more quickly than supposedly planned after next year,” he added.

The IFS said that while the spending increases announced by Reeves appeared big relative to the previous government’s plans, this was in large part because “their plans were unrealistic”.

Johnson said: “Despite the apparent scale of the increases, this is not going to feel like Christmas has come for the public realm.”

In her budget on Wednesday, the chancellor set out a real-terms increase in day-to-day spending on public services of 4.3% this year and 2.6% next year, before pencilling in a rise of 1.3% each year.

“It would be odd to increase spending rapidly only to start cutting back again in subsequent years,” Johnson said.

Reeves may have to break a few more election promises on tax to get on top of this.