A ‘painful sequel’ to the Budget may be coming, Deutsche Bank warns
Businesses should brace for a “painful sequel to the autumn Budget” this year as lacklustre growth raises the threat of further tax hikes from Rachel Reeves, Deutsche Bank has warned.
In a note to investors, the investment bank warned that growth was likely to slide below the Office for Budget Responsibility’s (OBR) projections in October after the economy flatlined toward the end of last year.
The UK economy shrank 0.1 per cent in October in its second consecutive monthly contraction.
Traders have also reined in their bets on interest rate cuts in the next 12 months, meaning that “big revisions” were likely to the OBR’s macroeconomic projections, according to Deutsche Bank.
“As a result of [this], more borrowing and tax rises, we think, will be likely this year,” wrote Sanjay Raja, the bank’s chief UK economist.
“We think Chancellor Reeves will likely need to lift taxes at least one more time following last year’s historic tax raising event,” he added.
The warnings come after Reeves launched a £40bn tax raid at her maiden Budget, falling largely on the shoulders of business and the wealthy, alongside a £70bn a year spending splurge.
While the increase in spending is expected to fuel a short term lift in growth, the OBR said the average rate of expansion over the next five years was unlikely to move.
The centrepiece of Reeves’ Budget, a £25bn rise in national insurance contribution, has triggered fury from businesses and warnings of painful price rises over the next 12 months.
Some of the country’s biggest retailers warned the charge is likely to lead to price rises and job losses this year. Deutsche Bank has predicted previously the rise in employers’ national insurance could end up costing the economy over 100,000 jobs.
Any move by Reeves to lift taxes again would mark an embarrassing climbdown after she ruled out further hikes and labelled the Budget a “once in a parliament reset”.
However, Prime Minister Keir Starmer later said he could not rule further tax hikes out in the event of “unforeseen” circumstances.
The government has said economic growth is its “number one mission” since taking power.