Fears are mounting of a major new Labour raid on taxpayers this year after rebels scuppered Keir Starmer’s hopes of cutting the welfare budget.
The Prime Minister effectively tore up his benefits reforms, which had been due to shave £5billion a year off spirallling costs by the end of the Parliament – but will now actually increase spending by £100million.
It leaves Chancellor Rachel Reeves with a major hole in her spending plans that can only be filled by raising taxes even further, by cutting public spending or by increasing borrowing.
Senior Cabinet minister Pat McFadden this morning refused to rule out tax rises as he warned the welfare rebels there would be ‘financial consequences’ to what they did in the Commons last night.
Ms Reeves has insisted Labour will stick to manifesto pledges of no hikes to income tax, employee National Insurance or VAT.
But she refused to guarantee yesterday that the hated freeze in tax thresholds – which drag people into higher rates due to inflation – will not be extended.
In a further blow to the Chancellor, last night Britain’s budget watchdog admitted it has been too optimistic about the country’s economic growth outlook.
At the same time, one of the jubilant rebel ringleaders urged the government to tax the rich to get the money for its plans.
Rachael Maskell, whose fatal amendment sparked the benefits shambles, urged a £24billion ‘wealth tax’ or a rise in capital gains tax to pay for more handouts.
Sir Mel Stride, the Tory shadow chancellor, said: ‘Tax rises are on the way to pay for Labour’s mismanagement of the economy.
‘Hard working families will have an agonising summer waiting to hear how Rachel Reeves will claw back the cash to make up for the failings of this weak Prime Minister.’
In March, the Office for Budget Responsibility (OBR) said Ms Reeves had just under £10billion of headroom to meet her fiscal rules.
But Rachel Reeves has seen the £4.8 billion predicted savings from welfare changes whittled away through the Government’s changes to plans designed to keep backbenchers onside.
In a late concession on Tuesday evening, ministers shelved plans to restrict eligibility for the personal independence payment (Pip), with any changes now only coming after a review of the benefit.
The Prime Minister had a revolt of almost 50 MPs regardless of the changes.
Economists at the Institute for Fiscal Studies (IFS) and Resolution Foundation think tanks warned that Tuesday’s concessions meant Ms Reeves could now expect no ‘net savings’ by 2029/30 – a key year for meeting her fiscal targets.
Mr McFadden told BBC Breakfast he is ‘not going to speculate’ on what could be in the budget, due in the autumn, but said that ministers ‘will keep to the tax promises’ in their manifesto.
Asked explicitly whether he could rule out tax rises, the Cabinet Office minister told the programme: ‘I’m not going to speculate on the budget.
‘We will keep to the tax promises that we made in our manifesto when we fought the election last year. But it doesn’t make sense for me to speculate on something where, as I say, there are so many moving parts of which this is only one element.’
But Mrs Maskell, the York Central MP, told BBC Radio 4’s Today programme that ‘we need to look at those with the broader shoulders’.
Asked what she would say to those who are worried about public finances, the York Central MP said: ‘As am I worried about the state of the public finances, and of course, we know what we inherited a year on, we have still got to keep our focus there.
‘And that’s why I think we heard very much in the debate, including from myself, that we need to look at those with the broader shoulders, as the Prime Minister said, contributing more into our system, but never pushing down on the poorest.
‘And that was what the dynamic was yesterday, that we do need to look at things like a wealth tax, £24 billion, or equalisation of capital gains tax.’
Ministers have repeatedly insisted that Labour will not raise taxes on ‘working people’, specifically income tax, national insurance or VAT.
But Ms Reeves also remains committed to her ‘iron clad’ fiscal rules, which require day-to-day spending to be covered by revenues – not borrowing – in 2029/30.
Yesterday, at Treasury Questions in the Commons, Tory Blake Stephenson asked Ms Reeves: ‘When the Chancellor sat on the Opposition Benches, she described freezing tax thresholds as ”picking the pockets” of working people. Does the Chancellor accept that she is now the one picking the pockets of working people?’
She replied: ‘In the Budget last year, we increased taxes by £40 billion, but without affecting the pay packets of ordinary working people. We did not increase their national insurance, their income tax or their VAT, and we did not go ahead with the wrong-headed increase in fuel duty that was put in place by the Conservative party.’
The Institute for Fiscal Studies’ incoming director Helen Miller said: ‘Since departmental spending plans are now effectively locked in, and the Government has already had to row back on planned cuts to pensioner benefits and working-age benefits, tax rises would look increasingly likely.
‘This will doubtless intensify the speculation over the summer about which taxes may rise and by how much.’
Last night the OBR warned in an annual assessment of its forecasting that its five-year forecasts had overestimated GDP growth by an average of 0.7 percentage points.
The watchdog also said it had ‘underestimated’ five-year ahead borrowing by 3.1 per cent of GDP in its projections.
But it insisted that its over-optimism was mirrored by other forecasters, and that ‘volatility’ around the world had increased the uncertainty around all forecasts in recent years.
Allan Monks, an economist with JP Morgan, told Reuters that the last time the OBR made a large downgrade to its growth forecasts in 2017 it said that the change had been foreshadowed in its forecast evaluation report.
‘The key question now is magnitude,’ Mr Monks said, adding that cutting 0.1 to 0.2 percentage points off the forecast for annual potential economic growth could cost the public finances between £9billion and £18billion pounds a year.
Ms Reeves already has very little room for manoeuvre, with wafer thin headroom that could be wiped out if the growth forecast is downgraded this autumn.
