Rachel Reeves will need to implement annual tax increases of £25bn to support her Budget spending plans, according to economists.
Capital Economics predicts the Chancellor will introduce “permanent” tax hikes to cover the planned increases in government expenditure fully. The consultancy also expects Ms. Reeves to raise borrowing by £18bn annually by the 2029/30 financial year to fund higher investment levels.
Her spending plans will be “limited” as she aims to avoid triggering higher borrowing costs for the government, which could result in increased inflation and interest rates. This cautious approach follows the market turmoil two years ago, when the mini-Budget under Liz Truss led to surging borrowing costs due to unfunded tax cuts.
Ruth Gregory, deputy chief UK economist at Capital Economics, noted that despite Ms. Reeves’ promise of a Budget focused on investment, she will have to be careful with investment spending. She explained that while investment could boost future economic growth, it risks raising market concerns that interest rates will need to be higher.
The scope for significant tax increases may also be constrained by the need to avoid hindering economic growth or exacerbating the cost of living crisis. According to Ms. Gregory, “We anticipate the Chancellor will introduce a net £25bn per year increase in current spending, financed by net tax rises of £25bn.”
Additionally, the government is expected to boost investment by about £18bn by 2029/30, which will “necessitate an £18bn increase in borrowing relative to the previous government’s plans.”
