The economy has already ‘paid a price’ for Labour’s ‘chaotic’ Budget preparations, economists warned yesterday – amid speculation that Rachel Reeves is preparing to unveil a series of ‘badly designed’ tax rises that will damage growth.
Experts warned that months of speculation fuelled by Treasury leaks and the Chancellor herself has ‘flatlined growth’, with investors, consumers and homebuyers all delaying key decisions.
And there are growing fears that, after backing away from a manifesto-busting hike in income tax, Ms Reeves will, in order to balance the books, be forced to reach for a string of damaging smaller tax rises when she delivers her Budget tomorrow.
The Chancellor is expected to announce a two-year freeze on tax thresholds, despite previously ruling it out, in a bid to raise £9 billion by stealth. She is also expected to unveil a pensions raid worth up to £4 billion by clamping down on popular salary-sacrifice schemes.
And Treasury figures have hinted at a string of smaller taxes on everything from gambling and taxis to mansions and milkshakes. But these do not come close to generating the £25 billion to £30 billion Ms Reeves is looking to raise. The much-publicised mansion tax, for example, may raise as little as £400 million.
Helen Miller, director of the Institute for Fiscal Studies (IFS), said Ms Reeves now risks ‘increasing taxes that are bad for growth’.
She told Times Radio: ‘If you do lots of small things, often our smaller taxes are particularly badly designed and therefore you can end up increasing taxes that are bad for growth.
‘Investors will be nervous if they see a list of tax increases, but don’t quite trust how much revenue it will bring in.’ Ms Miller added the build-up to the Budget had been ‘chaotic’.
Last night, there was growing speculation that Ms Reeves will end the ‘temporary’ 5p cut in fuel duty introduced when the Ukraine war triggered a sharp rise in petrol and diesel prices. But a Whitehall source said Ms Reeves could also be forced to take up a series of smaller tax proposals worked up by the Treasury over years but rejected by successive chancellors.
The source said: ‘The Treasury has a long list of potential tax rises, most of which are rejected year after year because they are bad ideas. If she is reaching into that box, then you could end up with a repeat of the pasty tax, or worse.’
Economist Mohamed El-Erian yesterday said the ‘chaotic’ Budget preparations had already damaged the economy.
The former head of investment giant Pimco told the BBC: ‘There are a number of data points that suggest the prolonged speculation has flatlined growth. You see this in the latest retail sales figures, which were the first decline since May. You see this in the decline of business confidence.
‘The economy has paid a price for a process that has been delayed, has been full of speculation and that has seen the Government send conflicting signals. A Budget has a journey and a destination. If you make the journey complex, if it seems chaotic, then your destination becomes harder to reach…it has made hard choices even harder.’
The warning echoes comments at the weekend by former Bank of England chief economist Andy Haldane, who said the ‘fiscal fandango’ of the past months had caused ‘paralysis’ among businesses and consumers. ‘We need a decisive action that puts to bed any notion of further tax rises,’ he said.
Paul Johnson, former director at the IFS, told Sky News: ‘You have seen thousands of people take money out of their pensions because they were worried about potential changes. You have had an effect on the housing market. There has been an effect on business investment. This is real-world damage.’
