Labour given fresh warning on ‘real’ risk of fiscal crisis without cuts
Labour Party parliamentarians have been alerted to the “real” risk of an economic emergency if spending cuts are not made as the incoming tax hikes at the Budget could trim growth and worsen the UK’s jobs crisis.
Backbench MPs have been widely blamed for failing to back the government’s small welfare cuts earlier this year, with the policy U-turn on personal independence payments (Pips) and winter fuel payments now costing Rachel Reeves some £6bn.
Parliamentarians blocking further spending cuts have been handed a new warning by a leading economics consultancy that the UK has “all the ingredients for a fiscal crisis” in the coming years should it not cut expenditure.
Capital Economics, a City forecaster which has been more optimistic about the UK’s prospects than the likes of KPMG and the think tank National Institute of Economic and Social Research (NIESR), has warned MPs failing to “stomach spending cuts” could mean households are hit by damaging tax rises.
Forecasters believe the government will have to raise some £28bn in extra revenue later this year, with tax rises likely to damage Britons’ real incomes.
A decision to target household incomes would lower household spending and shorten GDP growth by 0.2 percentage points, according to projections made by the consultancy.
‘Triggers’ that could destroy the UK economy under Labour
It said it did not forecast a crisis in the UK but the “real” risks were drawn from the possibility of a “trigger” sending the country into an economic meltdown.
Forecasters at the consultancy said a break from fiscal rules, the replacement of the Chancellor or a deterioration in official economic data could set a crisis in motion.
The election of Reform UK, with its “unfunded commitments”, could also trigger a fiscal crisis.
The latest warning comes after KPMG predicted the unemployment rate could near five per cent in the next two years while a slump in productivity risked leaving the UK behind by global standards.
The Big Four firm’s analysts highlighted a six per cent drop in intellectual property investment since 2020 as reflective of a drop in innovation across the country.
Low rates of AI take-up across businesses also risked keeping UK growth below its potential of around 1.5 per cent.