£50BILLION black hole misery for Reeves: Productivity downgrade blow to Chancellor – and we could ALL pay for it with income tax or VAT increase

Punitive tax rises this autumn are ‘inevitable’, economists warned last night after Rachel Reeves was told she faced a black hole of up to £50bn.

Experts have said it is increasingly likely that the Chancellor will now have to break Labour’s manifesto pledge not to introduce income tax, National Insurance or VAT.

It comes after the financial watchdog the Office for Budget Responsibility made a worse-than-expected cut to the UK’s productivity outlook ahead of next month’s Budget.

The Chancellor has already hit families and businesses with a £40bn tax increase and has vowed not to come back for more.

But the latest leaked forecasts suggest the strain could be even worse when Britain delivers its next Budget.

Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, said implementing Budget rules to reduce borrowing and debt while also increasing the ‘headroom’ towards these targets would mean ‘tax rises and spending cuts of up to £50bn’.

Mr Wood said that even if there were some positive forecast changes ahead of the Budget that would reduce this to £40bn, this would still ‘significantly increase the likelihood that the Chancellor will resort to a manifesto-busting income tax increase’.

Martin Beck, chief economist at consultancy WPI Strategy, said: ‘Given the scale of the challenge, it may become inevitable that the manifesto pledge not to raise “big three” taxes will be broken.

Sir Keir Starmer unveils his party’s manifesto alongside his then shadow cabinet on 16 December 2024

‘A 2p increase in both basic and higher rates of income tax, or reversing the 2023-24 NIC cuts, could raise roughly £20bn; ‘This is enough to fill the gap, but at a significant political cost.’

Productivity growth – effectively doing more with less – is key to getting the economy moving again and providing the tax revenues needed for the Government to balance the books.

But the situation has consistently turned out to be worse than the OBR had expected.

The watchdog is prepared to admit that it was being overly optimistic, and experts had predicted it would cut its productivity growth forecast by 0.1 to 0.2 percentage points.

The decision to do so now, in contrast to its stance under the previous Tory government, has reportedly angered No 10.

But a report in the Financial Times has revealed that the OBR is expected to make a bigger cut of 0.3 percentage points in the Budget on November 26. Treasury declined to comment. The Conservatives said the forecast was ‘a verdict on what will happen under a Labor Government’.

Shadow Chancellor Mel Stride told the Mail: ‘Labour has promised growth, but if the OBR cuts its forecasts it will be a damning verdict on Labour’s failure to deliver growth.

‘Rachel Reeves wants to blame everyone but herself. However, these predictions are forward-looking. Labor has no plan to fix productivity and does not have the backbone to cut spending; So under Labour, we will always be stuck in a disastrous cycle of more spending, rising debt and higher taxes.’

Before yesterday’s report, economists expected Ms Reeves would already be facing a £20-30bn black hole, thanks to rising borrowing costs and U-turns on policies such as welfare reform pushed by left-wing backbenchers.

Experts say the Chancellor (pictured with HE Ali bin Ahmed Al Kuwait) will now increasingly have to break Labor’s manifesto promise not to introduce income tax, National Insurance or VAT

Latest leaked forecasts suggest the strain could be even worse when Britain announces its next Budget

Speculation is already mounting that the Chancellor is actively considering an income tax increase. There are also fears that Ms Reeves could also target pensions, estates and homeowners to raise money.

He also plans to hit homeowners with a new mansion tax that real estate experts warn will hit the housing market.

Under the plan, revealed by The Mail on Sunday, owners of properties worth £2 million or more will face a fee of 1 per cent of the amount by which the property exceeds that value; That’s the equivalent of an annual bill of £10,000 for a house worth £3 million.

Research by the Solution Foundation think tank this week showed that the ‘effective tax rate’ for those earning an average of £33,000 a year is currently 27 per cent, the highest level in 13 years.