‘Tinkering around edges’ at budget risks another year of economic pain, IFS warns
A leading think tank has warned that tweaking the next budget risks another year of economic hardship and urged the chancellor to take “bold action” in November.
The Institute for Fiscal Studies (IFS) said it expected Rachel Reeves would need to find at least £22bn next month, thanks to rising borrowing costs, weak growth forecasts and spending commitments made since the spring.
But the IFS said there was a “strong case” for the chancellor to go further, arguing that a £10bn buffer – the amount of headroom Ms Reeves had previously left herself against self-imposed debt rules – was not enough to ensure stability and would leave her “limping from one forecast to the next”. That funding would probably have to come from tax increases, the think tank said.
While the think tank did not rule out spending cuts entirely, it said they would “create a challenge” given the lack of parliamentary support for welfare cuts and ministerial budgets only being agreed in June.
Speaking about the narrow gap left by the Chancellor in the last budget, IFS economist Ben Zaranko said: “The reason this causes so many problems is that you have a pass-fail rule and leave such a narrow margin against it that even fairly standard, typical forecast moves can be enough to push you to the wrong side of the line.
“This means that policy has to react extremely frequently… and this volatility itself creates damage.”
The £22bn figure does not include the cost of widely anticipated announcements to remove the two-child benefit cap and maintain the fuel duty freeze.
IFS director Helen Miller said the current situation, in which the Chancellor is likely to be forced to make major spending cuts or tax rises, was one he had “largely” created himself after choosing to “run his fiscal rules with such a tiny bit of headroom” that exposed him to “ordinary forecast changes”.
“For Rachel Reeves, the Budget will feel like a mountain,” Ms. Miller added.
The IFS said in November that implementing greater fiscal consolidation would be the “simplest way” to avoid similar challenges in future years.
But tax increases are far from simple; Labour’s manifesto excludes increases in income tax, national insurance or VAT.
Ms Miller suggested it might be possible to raise the required amount from changes to property taxes and charges such as capital gains tax or inheritance tax, but added these were “ill-conceived” and could harm growth.
The IFS also warned against charging “large sums of money to a small number of taxpayers”; Instead, he said the chancellor “must be brave” and reform the tax system to be “more rational” and less impactful on economic growth.
The IFS warning came after leading tax expert Dan Neidle, founder of Tax Policy Associates, said the chancellor would have no choice but to raise big taxes and reform others in the upcoming budget if he wanted to turn around Britain’s “desperate” economic situation, warning that smaller tax increases could not afford to fix margins by “picking from a Scrabble bag”.
He said the “smart” way for Ms Reeves to raise taxes would be to “increase one of the core taxes, possibly expanding the VAT base, which may or may not break the manifesto commitment.”
Asked on Wednesday whether the government could still ignore increases in VAT, income tax or national insurance contributions, the prime minister’s official spokesman pointed to Sir Keir Starmer’s earlier insistence that “the manifesto stands”. However, this will not explicitly rule out increases in taxes.
On the same day, Ms Reeves admitted she was looking at tax rises and spending cuts to plug the fiscal black hole, placing the blame on Brexit, which she said had a “serious and long-lasting” impact on the economy.
But shadow chancellor Sir Mel Stride claimed Labor “came into office with no plan”, adding: “The IFS has made clear the consequences of the chancellor’s decisions.”
“Rachel Reeves has introduced higher taxes, more borrowing and failed to provide a reliable path to growth; more tax increases are on the way.
“Britain faces serious economic challenges, but instead of facing them, Rachel Reeves and Keir Starmer are besieged by their own MPs and are too weak to take the tough decisions the country needs,” he said.
The IFS’s latest warnings come with the publication of the annual “green budget” and reveal the challenges the Chancellor faces each year ahead of the Budget.
The green budget also includes analysis from Barclays which suggests unemployment could rise to 5 per cent in 2026 due to slowing growth and above-target inflation.
Jack Meaning, chief UK economist at Barclays, said: “With the right policy decisions, this short-term challenge can be navigated towards a more positive medium-term outlook.
“If the Chancellor can avoid delivering an inflationary budget, headline price growth will decline significantly in the coming months, allowing the Bank of England to cut interest rates further and support more balanced economic growth for households and businesses.”
