Tax hikes would ‘take strain’ as headroom shrinks
Chancellor Rachel Reeves will likely announce a raft of tax increases to “take the strain” of higher public spending in areas including defence and health, leading economists have warned.
The last Autumn Budget saw a historic rise of £40bn in taxes as the Office for Budget Responsibility (OBR), the fiscal watchdog, said the tax burden would reach record post-war levels by 2028.
But economists are now preparing for even harder hits later this year after government borrowing in the fiscal year to March 2025 dwarfed the OBR’s forecast by £14.6bn as it hit £151.9bn over 12 months.
The Office for National Statistics also revealed that borrowing rose to £16.4bn last month, the last set of data before President Donald Trump’s tariffs were unveiled.
Pantheon Macroeconomics’ Elliott Jordan-Doak said that the government is highly likely to increase taxes at this year’s Autumn Budget to “take the strain” of higher public spending choices if she wishes to maintain her fiscal headroom of just under £10bn.
“President Trump’s tariffs now mean a likely hit to GDP growth this year and next, which will further weigh on the public finances,” Jordan-Doak said.
“The public finances were already in a difficult position heading into the trade war, and we think both taxes and borrowing will need to be raised in the October Budget.”
Among the key pledges made by the government is a commitment to raise spending on defence to 2.6 per cent of UK GDP by 2027. EY economic advisor Matt Swannell suggested that the Chancellor would have to consider a “fiscal re-think” later this year.
“Even before recent tariff announcements, we viewed the Spring Statement as a stop gap that left a lot of the big fiscal questions unanswered,” Swannell said.
“At its next fiscal event in the autumn, the government will likely have to raise taxes or bend its fiscal rules if it wishes to increase defence spending further or help some departments that face very challenging budgets.”
High borrowing figures for March will likely be a cause of concern for Reeves, who defended her fiscal rules as “robust” and essential to bringing government debt down.
The ONS said the government spent £105bn in servicing its debt across the last financial year. Debt interest payments are more than double pre-pandemic levels and could yet go higher as gilt yields continue to rise in the wake of Trump’s trade war.
Alec Haglund, a researcher at the not-for-profit policy group Positive Money, speculated on possible taxes the government could increase.
“The short-term solution to this would be a windfall tax on banks’ record profits, to recoup some of the public money banks have taken since rates started rising,” Haglund said.
“But to fix this broken system in the long-term, we need better approaches to dealing with inflation and debt management.”