Rachel Reeves ridiculed Tories 34 times over £22bn blackhole – then made one twice as big
New tax raid expected as Chancellor on course to leave Britain with a £41.2bn budget deficit, according to experts
Rachel Reeves has attacked the Conservatives 34 times in the Commons for leaving Britain with a “£22billion black hole” – but a respected economic watchdog has now warned of a looming £50bilion “gap” in UK finances. The Chancellor’s woes have worsened with warnings that tax hikes and spending cuts of more than £50billion a year will be needed to plug a budget deficit and preserve Britain’s “buffer” against financial turmoil.
Ms Reeves has been blasted for coming to office without a “clear plan” with experts saying “substantial tax increases” will be needed in the autumn Budget if she is to avoid breaking her fiscal rules. The National Institute of Economic and Social Research (NIESR) claims Ms Reeves faces an “impossible” set of choices – and warns the cost-of-living crisis is not over, with the living standards of the poorest people in Britain falling.
Despite Labour’s pro-growth rhetoric, the watchdog forecasts the economy will grow by just 1.3% this year and 1.2% next year. David Aikman, the director of NIESR, laid bare the nightmare choices facing the Chancellor.
He said: “Simply put, the Chancellor cannot simultaneously meet her fiscal rules, fulfil spending commitments, and uphold manifesto promises to avoid tax rises for working people. At least one of these will need to be dropped – she faces an impossible trilemma.”
NIESR’s experts found the Government is on course to miss its “stability rule”, under which day-to-day spending must be matched by tax revenues. Instead, it is forecast to face a budget deficit of £41.2billion in 2029-30 – the equivalent of 1.17% of GDP.
This means that if Ms Reeves is to preserve her £9.9billion buffer to protect Britain against economic shocks, she will have to find £51.1billion through higher taxes and lower spending annually by 2029-30.
Inflation is set to remain far above the Bank of England target rate of 2% at around 3.5% this year and 3% next year. Living standards for the poorest 10% of households are “some 10% lower than pre-Covid levels”.
Stephen Millard, the deputy director of the think tank, said “things are not looking good for the Chancellor” and recommended increasing the size of the buffer, warning that £9.9billion is “wafer thin” and could vanish if there is a “slight change in the fiscal circumstances”.
However, the think tank notes that raising around £50billion is the equivalent of hiking the basic and higher rates of income tax by five percentage points.
Mr Millard blasted Labour for arriving in power without a “clear plan”.
He said: “We had known for a year or two, I think, that Labour were going to be elected. So, the really disappointing thing from my point of view was that when Labour came in there didn’t seem to be a plan on the table.”
He warned it is impossible to “junk the fiscal rules” because this would lead to market upheaval and “we would have another Liz Truss moment”.
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‘The Chancellor must go’
Rachel Reeves has talked up growth but there are strong expectations she will be forced to hike taxes (Image: Andy Buchanan/Justin Tallis)
Shadow Chancellor Sir Mel Stride responded to the research, saying: “Experts are warning Labour’s economic mismanagement has blown a black hole in the nation’s finances which will have to be filled with more tax rises – despite Rachel Reeves saying she wouldn’t be back for more taxes. Labour will always reach for the tax rise lever because they don’t understand the economy.
“Businesses are closing, unemployment is up, inflation has doubled and the economy is shrinking.”
Reform UK deputy leader Richard Tice said: “Despite endless campaign promises not to raise taxes on working people, they broke that pledge immediately upon assuming office, and now seem set to do so again. This is a Government completely out of its depth – led by career politicians with no real-world experience, no understanding of business or trade, and no clue how to deliver economic growth.”
Julian Jessop, of the Institute of Economic Affairs, warned: “This is the ‘doom loop’ in action. Higher spending, higher taxes and higher borrowing costs are driving a downward spiral of weaker economic growth and a further deterioration in the public finances.
“Unfortunately, the Government has said and done nothing to suggest that the Autumn Budget will break this cycle.”
John Longworth, chairman of the Independent Business Network, called on Ms Reeves to quit.
He said: “The Chancellor is facing a potential debt crisis and stagflation but seems not to care … A busted flush, the Chancellor must go.”
The NIESR report will hike pressure on Chancellor Rachel Reeves (Image: Getty)
Daniel Herring, of the Centre for Policy Studies, agreed that without policy changes Ms Reeves “will almost certainly miss her fiscal targets this autumn”.
He said: “[Under] current fiscal rules, the Government cannot borrow more, and unfortunately it does not have the appetite for fiscal restraint. A growing economy would also help Rachel Reeves meet her targets, but Labour are not committed to the kind of radical economic reforms that would deliver growth.”
John O’Connell, chief executive of the Taxpayers’ Alliance, warned: “The UK is living way beyond its means, and has been doing so for quite some time. And while the Chancellor may not be entirely to blame, her reckless decisions on tax and spend have made the situation significantly worse.
“Rachel Reeves needs to urgently change course and get serious on spending to ensure she avoids further economically catastrophic tax hikes.”
A Treasury spokesman said: ““The OBR will publish an updated medium-term forecast alongside the Autumn Budget – we will not speculate on their forecast. As set out in the plan for change, the best way to strengthen public finances is by growing the economy – which is our focus.
“Thanks to our planning reforms, the OBR has said that the economy is expected to grow by the end of the decade.”
