Chancellor Rachel Reeves is “likely” to raise taxes at this year’s Autumn Budget, Institute for Fiscal Studies (IFS) director Paul Johnson has warned, as he claimed an extension to income tax thresholds would make for the “easiest political win”.
Reeves’ announced her £40bn tax raid at the last Autumn Budget in October. The bulk of the tax rises, which include increases to employers’ national insurance contributions is set to come into effect from next week.
But Johnson said “big downside risks” may destroy her £9.9bn of headroom within the next six months, leading to fresh tax hikes later this year.
“The easiest political win would be to extend the freezes on national income thresholds,” the IFS director said on Thursday.
“I’m not recommending that as a good policy, but it seems to have come with relatively little political downside.”
The Labour manifesto at the 2024 election said there would be no hike to income tax, national insurance or VAT, making choices more narrow for Reeves.
But Johnson suggested Reeves may have to unveil a major U-turn later this year.
“We don’t know how sacrosanct those promises are,” he said.
“It might be politically very unpopular if she needs to raise really significant amounts – £20bn plus. She’s going to struggle to get a lot from elsewhere.”
The IFS director also suggested the Chancellor should spend less time on “fiscal fine-tuning” and devote more attention to exploring “growth-enhancing policies” such as on planning reform.
“When you’ve got almost no room against your targets, and you’re absolutely set to meet them, then you’re almost inevitably going to have to do this kind of fine-tuning,” Johnson told City AM.
“Rachel Reeves took a gamble in October which was that things would get a little better over time in terms of the forecast. I’m afraid she lost that gamble.
“It feels to me that things will only get worse before they get better.”
He also recognised that the data collection troubles faced by Office for National Statistics (ONS) as well as changing global threats such as President Trump’s tariffs made forecasting harder for the Office for Budget Responsibility (OBR), the Treasury and the Bank of England.
In a separate event earlier in the day, the left-leaning Resolution Foundation think tank said public spending cuts announced at the Spring Statement had been a “fiscal sticking plaster” that only protected public finances in the short term.
Its research director, James Smith, said that turmoil in the global economy is likely to raise debt interest payments further.
“The effect of higher interest rates on borrowings [will lead to] a £10bn deterioration in borrowing just from that rise in global interest rates,” Smith warned.
Richard Hughes, the OBR’s chair, also appeared at the Resolution Foundation’s event and emphasised that Reeves’ headroom left public finances in a precarious position.
“One of the things we tried to stress is that £10bn [of headroom] is really nothing compared to the risks around the outlook,” he said.