Friday, March 28, 2025
Will under-siege Reeves have to increase taxes after all?
The Guardian reports that the Institute for Fiscal Studies are arguing that there's good chance she will have to raise taxes in autumn.
They say that the IFS has also released its considered verdict on the spring statement this morning:
Here are some of the key points from the opening presentation by Paul Johnson, the IFS’s director.
Johnson said that there is a good chance that Rachel Reeves will have to raise taxes in the autumn. And he claimed speculation about what taxes might rise could be economically damaging. He explained:
There is a good chance that economic and fiscal forecasts will deteriorate significantly between now and an autumn budget. If so, she will need to come back for more; which will likely mean raising taxes even further. That risks months of speculation over what those tax rises might be – a raid on pensions, a wealth tax on the richest, another hike to capital gains tax? I mention those not to commend them, far from it, but to exemplify the kinds of taxes regarding which mere speculation about increases can cause economic harm. With no sense of a tax strategy, we have no idea which way the chancellor might turn.
Reeves did not accept this when this point was put to her in interviews this morning. (See 8.07am.)
He said that Reeves’ obsession with ensuring she had exactly the same fiscal headroom as she did in the autumn budget was getting in the way of rational policy making.
We had £9.9bn of headroom in October. We have £9.9bn of headroom today. Astonishingly the numbers are within a mere £2m of one another. It is hard to believe this is a fluke. The Treasury has clearly worked overtime to ensure that precisely the same fiscal headroom remains today as was projected in October. This is not sensible.
He said that, while the sickness and disability benefit cuts announced last week were “defensible” (because costs were rising so much), the decision to announce an extra £500m in cuts yesterday, just to make sure the fiscal headroom figure did not change, was a mistake.
Whilst unquestionably tough for those on the receiving end, those original cuts were defensible as a response to problems manifested by huge increases in numbers of claimants, and in spending. One could make a defence of them unrelated to the details of any particular fiscal rule. Coming back a week later with just a slightly bigger cut because that’s what’s needed to return the fiscal headroom to precisely where it was a few months ago risks undermining that case and discrediting attempts at genuine reform to the benefit system. If it was right last week to announce a halving of the health component of universal credit, it is hard to see why this week it is right to do more than that by halving it and then freezing it in cash terms.
He said having little fiscal headroom, and then applying the fiscal rules rigidly, was “not conducive to a sensible policymaking process”.
It is the combination of “iron-clad” pass/fail numerical fiscal rules and next to no headroom against them that is causing so many problems, leaving fiscal policy completely exposed to economic developments outside the government’s control. That is not conducive to a sensible policymaking process. This is not the OBR’s fault. It is the product of the chancellor’s choices.
He said future government spending was “even more front-loaded than before”.
Spending growth is now set to be 2.5% in 2025-26, 1.8% in 2026-27 and 1.0% in each of the subsequent three years. One should always be sceptical of plans to be prudent, but only in the future. Front-loaded or not, the problem for the chancellor is that keeping to these growth rates overall will inevitably mean cuts for some departments in the years to come.
It doesnt look like plain sailing for the Labour Chancellor at all, with more yet more pain ahead of us.
