Economists have warned that Rachel Reeves’s economic policy could lead to further tax rises.

The Chancellor’s October budget was widely criticised (Image: Getty)

Economists have warned that Rachel Reeves’s economic policies could leave the door open for populist parties to rise in popularity. Moody’s has warned that the Chancellor’s decision to impose strict fiscal rules on herself, her tax raid on businesses and slim ‘headroom’ could prevent the government from achieving its plans for growth and increased productivity.

They warned that in doing so, the Chancellor could be unwittingly boosting the popular appeal of populist parties in British politics. So far in this parliament, Reform UK has seen its support surge, with many polls predicting that it could challenge Labour in a future general election and match its success in recent local elections. They said: “The domestic political environment continues to remain polarised, with the potential for support for populist parties to grow and influence policy.”

Economists have warned that the government’s fiscal policies could aid populist parties (Image: Getty)

The government’s decision in October’s budget to raise national insurance contributions of employers has been widely criticised for stymying growth and business confidence.

The Chancellor’s decision to leave just £9.9 billion of fiscal headroom in the Spring Statement to meet her self-imposed tax rules was also widely derided as leaving the government vulnerable to economic changes.

In a note this week, Moody’s said: “The fiscal headroom remains vulnerable to downward revisions to UK growth forecasts or higher interest rates, which may necessitate new tax measures in the autumn Budget that risk further subduing growth.

“For example, the Government decision to raise employer National Insurance contributions in the October 2024 budget dented business confidence and will weigh on growth in 2025.

“Spending pressures have also increased because of geopolitical risks that necessitate higher defence spending.”

They added that tight fiscal headroom and slow economic growth “may necessitate new tax measures in the autumn Budget that risk further subduing growth”, piling even more pressure on the public finances.

Reeves under pressure from department leads ahead of the impending Spending Review (Image: Getty)

The government has committed to raising defence spending to 2.5% of GDP by 2027 but is under pressure from the United States and continued war in Europe to raise spending to 3% and beyond.

Ahead of the upcoming Spending Review, pressure is mounting on Reeves by members of her cabinet as ministers of state seek to maximise their departmental budgets.

Last week, week a leaked document revealed that Angela Rayner had demanded increased taxes on the British people and two benefit cuts as well as increased spending in affordable housing.

An ally of Ms Rayner told The Telegraph: “Having less money in the affordable housing pot would be a real problem,” amid a government pledge to build 1.5 million houses this parliament.

The government will set out capital spending plans for the Parliament at the Spending Review in June.