Labour’s immigration crackdown could force Reeves to raise taxes, leading economists warn
Britain’s most respected think tank has warned that Labour’s crackdown on immigrants could force Rachel Reeves to raise taxes.
The Institute for Fiscal Studies has warned that low immigration levels could lead to shortfalls in tax revenue and trigger “another tough Autumn Budget” later this year.
This could force them to raise taxes or cut public spending to balance the books, he said.
The IFS warned that if net migration continues to fall or stabilizes at a level significantly below official forecasts, this could “deal a serious blow to (economic) growth… and overall tax revenues”.
The Chancellor announced a £40bn tax increase in the 2024 Budget in a bid to boost public services and grow the economy. He then announced a further £26bn worth of tax increases in last year’s Autumn Budget.
The IFS warning comes just days before Ms Reeves is due to tell Parliament in the spring term, when she will explain the state of the UK economy and how this could affect government spending. Experts said this “should largely be seen as setting the stage” for what happens in the Budget.
The IFS said the updated forecasts outlined by Ms Reeves “are likely to include indicators of potential risks looming on the horizon – which if crystallized could raise the specter of another difficult Autumn Budget”. These include the potential shortfall in tax revenues caused by a larger-than-expected decline in immigration.
Successive governments, including Labor, have announced a crackdown on immigration after figures hit nearly one million in just 12 months in 2023.
These initiatives have been extremely successful; Figures have fallen by two-thirds in a year due to a huge fall in the number of people coming to the UK for work or study.
However, this sharp decline also means less money is paid to the Treasury in taxes.
The IFS noted that new immigrants are disproportionately more likely to be of working age and less likely to make extensive use of health and care services. In most cases, they will not be able to claim benefits for at least the first few years after arriving in the UK.
In November, the OBR forecast that net migration would fall from a peak of 900,000 in 2023 to around 260,000 in 2026 and 2027, before rising again to 340,000 in 2030.
But the latest figures, released just after last year’s Budget, reveal that the provisional figure for 2025 is 204,000, well below the forecast of 290,000.
The IFS warned that if net migration figures continue to fall or fall significantly below the Office for Budget Responsibility’s forecasts, this could “deal a serious blow to growth and overall tax revenues”. The report said the issue had “the potential to hit tax revenue forecasts”, including Ms Reeves having to reinstate her self-imposed fiscal rules in the Budget.
Nick Ridpath, research economist at the IFS and one of the authors of the analysis, said: “‘The OBR will likely wait for further data before updating its medium-term outlook, but if recent trends continue the Chancellor’s fiscal rules could be brought back into focus by the Autumn Budget.”
Ms Reeves’ rules prevent her from taking out debt to pay for day-to-day expenses and require the debt-to-GDP ratio to fall by 2029/30, limiting her ability to deal with shortfalls.
Last week the IFS said Ms Reeves should scrap her self-imposed rules on debt and borrowing to stop the “dysfunctional” policymaking behind Britain’s economic uncertainty.
The Treasury was contacted to get an opinion on the issue.
