Introduction

In a surprising turn of events, leading economists are raising the alarm that taxes may still need to rise this autumn, despite recent major cuts to welfare and spending announced during the government’s Spring Statement.

Chancellor's Commitment

Chancellor Rachel Reeves, who has pledged not to borrow for day-to-day expenses, seems to be on track to maintain this commitment. However, the official forecasts from the Office for Budget Responsibility (OBR) have introduced an unsettling element into the equation: global economic instability, particularly influenced by potential tariffs imposed by the US, could significantly impact the UK economy.

Economists' Warnings

“Ongoing uncertainties in international trade could be devastating,” warns Paul Dale, Chief UK Economist at Capital Economics. “With the UK grappling with a mix of sluggish economic growth and soaring interest rates, the scope for borrowing is limited. Eventually, this may force the government to backtrack on its promises and impose tax increases on households.”

Fiscal Vulnerability

This sentiment echoes across the industry, as Paul Johnson, Director of the Institute for Fiscal Studies, notes that “a lack of flexibility in fiscal policy leaves the government vulnerable to external shocks.” Speculation around potential tax increases has begun, with many experts predicting a fraught discussion over taxation as autumn approaches.

Past Tax Increases

Interestingly, during her previous Budget, Chancellor Reeves already increased taxes for businesses, leading to questions about whether households might face similar burdens soon. When questioned about the possibility of recurring tax increases in the upcoming Budget, Reeves confidently declared that such a situation would not happen again, though skepticism remains high among economists.

Growth Forecasts

Adding to the urgency is the OBR's significant downgrade of UK's growth forecast for this year, slashing it from 2% to a mere 1%. Reeves has expressed dissatisfaction with this projection, as she emphasizes her commitment to boosting economic growth—a fundamental objective of her administration.

Chancellor’s Economic Strategy

The Chancellor’s economic strategy has been predicated on two main pillars: avoiding borrowing for everyday public spending and ensuring that government debt declines as a share of national income by the end of the parliamentary term. As of the latest reports, there is a narrowing headroom of £9.9 billion available by 2029-30 post-cuts, significantly lower than the historical average of £30 billion.

Impact of Global Economic Shifts

Analysts are increasingly warning that global economic shifts—should the US implement an additional 20% tariff on UK imports—could decimate the already fragile economic landscape. Richard Hughes from the OBR highlighted that such measures could lead to a 1% decline in UK output and eliminate the government’s fiscal buffer.

Future Tax Increases Expected

With defence spending anticipated to rise ahead of 2027, Rob Wood, chief economist at Pantheon Macroeconomics, believes more tax increases and borrowing will soon follow.

Positive Traction in Housebuilding Projects

Meanwhile, housebuilding projects are gaining positive traction, expected to reach a 40-year peak, potentially bolstering the economy by £6.8 billion, according to forthcoming planning reforms.

Inflation Estimates

On the inflation front, the OBR has raised its estimates for this year to 3.2%, with a forecasted return to the Bank of England’s target of 2% by 2027.

Conclusion

As the government grapples with these fiscal challenges, the debate on potential tax increases is more pressing than ever. Can Chancellor Reeves stay true to her promises without resorting to raising taxes? The upcoming full Budget later this year will be pivotal in determining the future path of the UK economy. Stay tuned for updates—you won’t want to miss what happens next!