Rachel Reeves fired a Budget tax warning yesterday as experts predicted she could have to plug a £40billion black hole this autumn.
The Chancellor said there would be ‘a cost’ to this week’s U-turn on welfare reform, which she said would be ‘reflected in the Budget’.
Ms Reeves declined to say how this and other recent U-turns would be funded. But she insisted she would not change her ‘fiscal rules’, leaving tax rises as the most likely option.
Her comments are the clearest hint yet that taxpayers are set to be penalised for the Government’s capitulation to Labour MPs opposed to any attempt to bring Britain’s bloated benefits bill under control as Sir Keir Starmer tried to fight off a rebellion.
They came amid growing warnings over the likely scale of the looming crisis in the public finances.
The Institute for Fiscal Studies (IFS) think-tank said that Ms Reeves could have to find as much as £40billion this autumn – equal to the sum raised by her record tax-raising Budget last year, which was blamed for bringing economic growth to a halt and which she promised not to repeat.
Ben Zaranko, an economist at the IFS, said it was ‘not hard to imagine a world where they are of a ballpark similar scale to last autumn’. He added: ‘If you have the perfect storm of economic forecasts being downgraded, additional spending commitments because these reforms haven’t got through Parliament, and the world is in a gloomier place generally, you could comfortably be into double-figures billions even before you talk about any retail offers.
‘A £20, £30, £40billion Budget is not what the Government would want but it’s not impossible by any means.’
Last year’s Budget tax bomb included a £25billion raid on employers’ National Insurance, which has been blamed for fuelling inflation and unemployment and slowing investment and growth.
The following month, the Chancellor told the Confederation of British Industry that she would not need further tax rises as the Budget had ‘drawn a line under the inheritance’ she received from the last Conservative government.
‘Public services now need to live within their means because I’m really clear, I’m not coming back with more borrowing or more taxes,’ she said.
But the pledge has been quietly ditched in the wake of sluggish economic growth blamed partly on the impact of the Budget.
The Office for Budget Responsibility (OBR) halved its growth forecast for this year in March. This week the economic watchdog hinted at a further likely downgrade after admitting that previous forecasts had proved too optimistic. Economists have warned that a 0.2 per cent downgrade in the OBR’s forecasts would leave the Chancellor with an £18billion hole to fill.
The problem has been made worse by recent costly U-turns on welfare. Sir Keir’s climbdown on the winter fuel allowance will cost £1.5billion. This week’s retreat over cuts to the Personal Independence Payment (PIP) could cost as much as £6billion.
And Labour MPs are pushing for the abolition of the two-child benefit cap.
Ms Reeves and Sir Keir yesterday refused to say how any of these measures would be paid for. Shadow Chancellor Sir Mel Stride said voters were paying the price of Labour’s ‘inability to govern’.
He told the Mail: ‘Labour’s welfare shambles has left the country facing a ticking tax timebomb.
‘Businesses and hardworking families should brace themselves for further painful tax hikes as Rachel Reeves scrambles to plug the gaping hole left by this weak prime minister’s economic mismanagement. This week’s chaos exposes Labour’s inability to govern – pushing us towards higher taxes and a spiralling debt crisis. It doesn’t have to be this way.’
Labour MPs lined up in the Commons this week to demand the introduction of wealth taxes to pay for higher benefits.
IFS director Paul Johnson told Times Radio the Chancellor would be ‘caught between a rock and a hard place’ if she needs to raise substantial sums this autumn. He added: ‘Politically, she’s going to be under pressure to impose a wealth tax or hit high earners or capital gains [tax] or something. And the markets will respond very badly to that, because they’ll be worried about its impact on growth.
‘The alternatives are to essentially break some manifesto commitments on increasing income tax or VAT. And I think her backbenchers and the electorate will react very badly.’
The Prime Minister yesterday insisted that the Government would press on with welfare reform, despite his humbling at the hands of Labour backbenchers this week. He said it was ‘important we reform the system’ as ‘welfare isn’t working’. But in an embarrassing development, the parliamentary authorities forced Sir Keir to change the name of the Universal Credit and Personal Independence Payment Bill after cuts to PIP were dropped from the legislation.
Commons leader Lucy Powell said it would be shortened to the Universal Credit Bill as it will be ‘narrower in scope’.
