Taxes could still rise despite welfare cuts, economists warn

Economists are warning that the UK may still need to raise taxes in the autumn, despite significant cuts to welfare and spending announced in Wednesday's spring budget statement. This prediction has sparked concerns about the sustainability of the government's fiscal policy and left the public uneasy about the future economic outlook. These concerns highlight the delicate balance the government must strike between fiscal responsibility and economic growth.

According to the government's official forecasting body, Chancellor Rachel Reeves is expected to adhere to her own rules of not borrowing to fund day-to-day spending and maintaining a margin for error. However, the body also warned that global uncertainty, stemming from potential tariffs imposed by US President Donald Trump, could shock the UK economy and undermine Reeves' plans. In such a scenario, experts suggest that further spending cuts or increased borrowing would become difficult, potentially necessitating tax increases to achieve her objectives. This underscores the vulnerability of the UK economy to external factors.

Paul Dales, chief UK economist at Capital Economics, stated, "There is limited scope for cuts in non-defence spending. The combination of slow UK economic growth and high interest rates also means there is limited scope for increases in public borrowing." He added, "The unavoidable conclusion is that at some point the government may have to break its election promise and raise taxes on households – the full Budget later this year will be the next key moment." The challenge lies in finding a sustainable path forward without compromising economic stability or voter trust.

Paul Johnson, director of the Institute for Fiscal Studies, said that Reeves has little room for maneuver, "leaving you at the beck and call of events." He predicted, "We can certainly expect now that for the next six or seven months, there will be speculation about which taxes might or might not be increased in the autumn." Reeves, who raised corporation tax in her first budget in October, said when asked if taxes would be raised again in this autumn's budget: "We never have to do a budget like that again." The pressure on the Chancellor to navigate these fiscal challenges is immense.

The Office for Budget Responsibility (OBR) also halved its growth forecast for the UK this year to 1%, down from the 2% predicted in October. Reeves stated, "I am not happy with these numbers." She has made boosting economic growth one of her key pledges. However, the OBR raised its growth forecasts for future years, with Reeves noting that by 2029-30, the economy will be larger than forecast at the time of the October budget. Despite the current slowdown, the long-term outlook offers a glimmer of hope for economic recovery.

Ahead of the spring statement, the Chancellor had been facing pressure amid speculation about how she would be able to meet her self-imposed fiscal rules. The two key rules are: not borrowing to fund day-to-day public spending; and for government debt as a share of national income to be falling by the end of this parliament. In October, the OBR said Reeves had £9.9 billion of headroom on day-to-day spending in 2029-30 – the amount left over after meeting the fiscal rules. The Chancellor said that since then, changes in the global economy had changed the picture and she was set to miss her target by £4.1 billion because of increased government borrowing costs. However, the measures she announced on Wednesday "fully restore our headroom" to £9.9 billion. This demonstrates the government's commitment to maintaining fiscal discipline despite economic headwinds.

The OBR acknowledged that the risks to the global outlook have increased since October. The OBR's Richard Hughes told the BBC: "If the US were to impose an additional 20% tariff on the UK and the rest of the world, that could reduce the level of UK output by 1% next year and wipe out the Chancellor's headroom against her fiscal rules." The £9.9 billion is the third-lowest amount of headroom a Chancellor has given themselves since 2010. The average amount of headroom in that period is £30 billion. On the second rule, Reeves said the OBR forecasts it will be met two years early, with £15.1 billion of headroom in 2029-30. These figures highlight the precariousness of the UK's economic position in the face of global uncertainties.

Looking ahead to growth in future years, the OBR now expects the economy to grow by 1.9% in 2026, 1.8% in 2027, 1.7% in 2028 and 1.8% in 2029. However, Rob Wood, chief UK economist at Pantheon Macroeconomics, said he thought the OBR "will almost certainly have to cut its potential growth forecasts in the autumn" and also expects defense spending to rise by 2027. "Therefore, further tax rises and borrowing are coming," he said. The OBR said real household disposable income per person is forecast to grow by about 0.5% a year on average. The forecaster said stronger wage growth meant this figure was slightly higher than its October forecast. Reeves said this meant that by 2029-30, people would be on average more than £500 a year better off than the OBR expected in October. Despite some positive projections, the potential for future economic challenges remains a significant concern.