Rachel Reeves risks ‘serious damage’ with tax hikes, OBR member warns
Fears of another Rachel Reeves’ tax raid are growing after fresh figures revealed the economy shrank in May, but a member of the OBR has warned the Chancellor against drastic measures, including tax hikes.
The Chancellor is facing renewed pressure, with economists warning that the government’s £190bn spending splurge, sporadic U-turns, and poor growth figures are set to open a £30bn shortfall.
The Office for National Statistics (ONS) reported that the UK economy contracted by 0.1 per cent in May, missing City predictions of 0.1 per cent growth and further alleviating tax fears.
But a member of the Office for Budget Responsibility (OBR) committee has warned the UK’s “ratio [of] tax [to] GDP is now getting to levels that we really haven’t seen since the Second World War”.
Tax hikes coming?
Professor David Miles told CNBC: “The scope to simply just raise more and more tax revenue is definitely limited” with any further hikes creating “so many discentives” around saving, investing and working.
Miles said looking for taxes “wherever you could find them” would begin to cause “serious damage to the growth potential of the economy”.
This followed the OBR releasing a report on Tuesday stating the UK economy was set for a “daunting year” due to unfunded spending commitments and global trade tensions.
The report stated that recent U-turns on welfare reforms and winter fuel payments were “not reflected in medium-term forecasts and budgets,” and were expected to put a greater strain on public finances.
Economy to weaken further?
Whilst the economy boomed with 0.7 per cent growth in the first quarter, a 0.3 per cent contraction followed in April.
Barret Kupelian, chief economist at PwC, said the second consecutive month of economic contraction could be the beginning of a trend.
Kupelain said: “A single month’s GDP is like a lone brushstroke; it tells you little. However, when paired together with other months, it gives us an indication of the direction of travel for the economy. And that story is beginning to turn sour for the UK.
The ONS pointed to declines in construction, oil and gas extraction, car manufacturing and pharmaceutical production as driving the slump.
The manufacture of motor vehicles, trailers and semi-trailers industry fell by 3.7 per cent in May 2025, following a fall of 9.5 per cent in April 2025. This came despite the UK securing a trade deal with the US that detailed a lower tariff rate of ten per cent on the first 100,000 UK-manufactured vehicles.
“Tariff uncertainty still hangs over the industry like a stubborn fog. The services sector grew marginally, offsetting some of the negative momentum in the rest of the economy,” he added.
Kupelain said growth projections ahead of the new figures had the UK in the “middle-of-the-pack” among the G7 at around one per cent. But he warned with “growth momentum rapidly slowing, there’s a genuine risk we slip down the rankings”.
Economists at KPMG warned after the Spending Review a growth forecast of just 1.2 per cent would lead to public sector revenues falling below Reeves’ expectations.
Labour’s latest U-turn
The renewed fiscal pressures comes after Labour’s latest U-turn on welfare reforms, which ministers had hoped would secure £5bn in savings.
The government has refused to rule out a number of tax hikes, including a wealth tax, which Sir Keir Starmer refused to dismiss at Prime Minister’s Questions.
Starmer also failed to commit to extending the freeze on income tax thresholds, often dubbed as a “stealth tax”.
The Institute for Fiscal Studies (IFS) suggested a freeze on thresholds could raise the government nearly £9bn in revenue.