The UK remains in a weak fiscal position after Wednesday’s Budget despite the Chancellor launching an historic fiscal consolidation in an attempt to shore up the public finances and avoid another tax raising budget, several top economists have warned.
Rachel Reeves chose to hike taxes by £26bn via a vast combination of sector-specific levies, pension reform and freezing tax thresholds to make up a fiscal position blown apart by spending pledges and shifts in the global economic picture.
The decisions will take the UK’s overall tax burden to the highest it has been as a percentage of gross domestic product in history, surpassing the previous benchmark set in the immediate aftermath of the Second World War. As a result, the Chancellor now has £22bn of breathing space against her self-imposed debt rules, more than double the total she set herself at last year’s Budget and March’s Spring Statement.
Investors and economists had said boosting that buffer would help reduce the rampant speculation over tax rises that has plagued the economy and unnerved markets in the months leading up to Wednesday’s speech.
Credibility gap
But after the Chancellor unveiled a piecemeal and backdated approach to reinstating that breathing space, several top economic analysts have said the UK remains in a delicate fiscal position.
Michael Saunders, a former Bank of England rate-setter who is now senior economic adviser at Oxford Economics, warned demographic pressures, ballooning welfare costs and elusive economic growth will continue to push Britain’s economic credibility to breaking point.
“The Budget still leaves the UK with a relatively weak fiscal position, with the public debt/GDP well above levels of 20 years ago, low potential growth and ageing population,” he said. “The UK is still not securely on a sustainable fiscal path.”
By choosing to implement a strategy of raising multiple smaller tax rises – dubbed a ‘smorgasbord’ in economic circles – many of the Chancellor’s promised revenue raising measures will not come into force for several years.
Some moves – such as the mansion tax on homes worth more than £2m – will only be introduced in 2028, an approach investors in UK gilts and market analysts had warned Rachel Reeves against. Many saw a more immediate consolidation, via a hike to income tax or similar, as more market-friendly.
Kicking the can down the road
“This approach effectively kicks the can down the road until the next parliamentary election to deal with the spending gap,” said David Zahn, head of European fixed income at Franklin Templeton. “The probability that those tax changes are delivered seems low given it will be a new parliament, potentially with a different majority party.”
Concerns were also raised over the growth-generating potential of the suite of policies unveiled in the House of Commons. According to the Office for Budget Responsibility’s official scorecard – published alongside the speech – “none of the… measures in the Budget have a sufficiently material impact” on official growth projections.
Arun Advani, a director at the Centre for the Analysis of Taxation, said that despite being a government “supposedly obsessed with growth” this year’s Budget will not change the UK’s economic outlook.
“Overall, the tax changes are unlikely to move the needle on growth much one way or the other,” he added.