Rachel Reeves could be forced to raise taxes AGAIN despite OBR warning burden is ALREADY hitting economy – as Middle East war threatens to wipe out her ‘headroom’

Rachel Reeves may be forced to raise taxes once again as the Middle East crisis threatens to further damage the economy.

The Chancellor has imposed a staggering £75bn a year in extra taxes on Britons, and yesterday’s Spring Statement revealed the burden is on course for a new record.

Much of this has resulted in spiraling benefit costs, with Labor MPs forcing the government to abandon efforts to cut spending and scrap the two-child benefit cap.

But while Ms Reeves boasted about the government’s improving finances, the Treasury’s OBR watchdog made clear she was balancing the books largely on the back of windfall taxes from rising stock markets.

The watchdog warned that a 35 per cent fix would add £26bn to borrowing and effectively eliminate the Chancellor’s ‘headroom’ to meet his main fiscal targets.

The FTSE 100 index has shed nearly a month’s gains in the past few days after Donald Trump’s attacks on Iran triggered global panic.

OBR documents accompanying Ms Reeves’ Spring Statement showed that even before the crisis the tax burden was on track to reach an unprecedented level of 38.5 per cent of GDP in 2030-31

As well as the impact on savings and pensions, inflationary pressures now look set to stop the Bank of England from cutting interest rates this month, with Brits also facing eye-watering rises in their energy bills.

OBR documents accompanying Ms Reeves’s Spring Statement showed that even before the crisis the tax burden was on track to reach an unprecedented level of 38.5 per cent of GDP in 2030-31.

That’s even higher than the 38.3 percent the watchdog predicted in November.

A million pensions are at risk of being dragged into the tax system in a ‘secret raid’ to freeze thresholds for longer.

The OBR expressed concerns that the Government relied on a small base of better-off taxpayers for the bulk of revenues and that the ‘latent pressure’ to freeze earnings thresholds was too sensitive to changes in inflation and earnings.

The OBR’s David Miles said this morning he was investigating how much damage higher taxes were doing to the economy.

He told BBC Radio 4’s Today programme: ‘It is very difficult to raise taxes faster than GDP – which is what is really needed to get the finances back under control – it is difficult to do that without doing some damage to the incentives to invest, to work, to save…’

He said the OBR already had ‘a view that it has eroded to some extent what you might call the productive capacity of the UK’.

‘I think we’re having to raise taxes faster than GDP; “It is very difficult to do this without some knock-on effects that will probably have a negative balance effect on employment and the productive potential of the economy,” he added.

The IFS think tank said meeting NATO’s commitment to spend 3.5 per cent of national income on defence, up from 2.4 per cent currently, would cost £35bn a year in today’s terms.

This is equivalent to the budgets of the Ministry of Justice and the Ministry of Internal Affairs combined, and the tax increases will be: 3 to 3.5 percentage points over the main VAT rate.

IFS director Helen Miller said: ‘The takeaway here is that we should not expect the Government to meaningfully increase the amount we spend on defense (if that is what it wants to do) without significantly cutting other Government programs or increasing taxes.’

He said events and market reactions in the Middle East represented Wednesday’s ‘big economic news’ rather than Rachel Reeves’ spring announcement.

Ms Miller added: ‘Petrol prices rose by more than 20% yesterday and are up almost 80% on Friday. The stock market fell almost 3 percent. The cost of borrowing has skyrocketed. Perhaps these changes will be short-lived. There are many days when there are big market moves that we quickly forget about.

But if the war in the Middle East drags on, it will obviously be bad news for all of us, including the Chancellor.

‘From an economic perspective, higher oil and gas prices and greater economic uncertainty will negatively impact economic growth. As inflation increases, disposable incomes will decrease. Higher inflation will likely mean higher interest rates.

‘We should all hope that we are not facing a protracted conflict.’

Paul Dales, chief UK economist at consultancy Capital Economics, said the OBR forecasts apparently provided the Chancellor with ‘a bit more money’ in the autumn budget that could be strangled by events in the Middle East.

He added: ‘The economy may therefore point to further tax increases.’

In a low-key update to MPs yesterday, the Chancellor stressed that Labor had ‘restored economic stability’ and was finally beginning to tackle inflation, which he said was needed more than ever given the Middle East crisis.

In a warning against a lurch to the Left following last week’s by-election defeat by the Greens, she urged Labor to resist ‘the temptation of easy answers and reckless borrowing’.

Ms Reeves defended the unprecedented tax raid and said Labor was ensuring ‘those with the broadest shoulders pay higher taxes’.

But in another gloomy assessment, the OBR predicts unemployment will rise to 5.3 per cent, equal to the worst levels seen during the pandemic.

‘Worrying’ youth unemployment figures have ‘still some way to go’, partly spurred by higher minimum wages and discouraging employers from hiring young people, it said.

Ministers are still mulling whether to go ahead with manifesto plans to equalize the minimum wage for under-21s with the main adult wage, amid warnings it would deepen the crisis.

Former chancellor Sir Jeremy Hunt said tax levels had already been raised so high that they would damage the economy.

Sir Jeremy said the £66bn tax increases Ms Reeves implemented in her first 18 months in office were equivalent to £2,300 per household.

Sir Jeremy called on him to target benefit cuts instead, saying: ‘If the real concern is the cost of living, wouldn’t the biggest mistake be not increasing taxes by £66bn, the equivalent of around £2,300 per household?

‘If this money is needed for public services, almost all of it (£54bn in fact) could be achieved by reducing the welfare bill to 2019 levels.

‘Is it sustainable to keep increasing taxes on working people to provide more benefits to non-working people?’

The Treasury stressed that no tax or spending measures were announced in the Spring Statement as part of a new commitment to hold only one fiscal event per year. This will be the budget in the fall.

The OBR’s database of historic Budget measurements shows Ms Reeves has been “scored” to have added £75.1bn a year to the tax burden since she became 11th in July 2024.

In another bleak assessment, the OBR predicts unemployment will rise to 5.3 per cent, equal to the worst levels seen during the pandemic

The staggering figure makes him the highest-taxed Chancellor in the last six decades, well ahead of his nearest rival on the dubious distinction.

This was Labor politician Gordon Brown, whose financial statements revealed an extra £62.1bn.

Rishi Sunak came third with a £54.9bn tax increase announced as he struggled to cope with the effects of Covid and the Ukraine war. Norman Lamont’s raises in the 1990s were valued at £41.7bn, George Osborne’s at £41.6bn.

The OBR holds figures for all tax policies ‘scored’ in fiscal events since 1970, adjusted for GDP growth to date.

The figures do not take into account measures that increased by more or less than expected and overlook some minor changes leading up to the establishment of the watchdog in 2010.

But they give the best available indication of the size of the packages announced by the Chancellors.