By: Rimi
Published on: Mar 27, 2025
Rachel Reeves’ Budget Gamble: Will Autumn Bring Tax Hikes to the UK?
UK Chancellor Rachel Reeves has doubled down on a risky fiscal strategy, leaving the door open for potential tax hikes this Autumn. By restoring the government’s fiscal buffer to a precarious £9.9 billion—the third smallest on record—Reeves aims to balance credibility with markets while navigating a £14 billion deficit in public finances. But critics warn her razor-thin margin for error could unravel quickly, forcing tough decisions ahead.
In this deep dive, we analyze the risks behind Reeves’ budget plan, the Office for Budget Responsibility’s (OBR) cautious optimism, and the political turbulence threatening Labour’s economic agenda.
Faced with soaring debt interest costs and weaker-than-expected tax receipts, Reeves turned to spending cuts, welfare reforms, and anti-tax avoidance measures to claw back £14 billion. Key adjustments included:
£4.8 billion in welfare reductions, impacting 250,000 people (including 50,000 children) by 2030.
£3.6 billion trimmed from departmental budgets, squeezing public services.
£2.2 billion from closing tax loopholes and local government levies.
These moves restored the fiscal buffer to its October 2024 level, but OBR Chair Richard Hughes flagged a 46% chance of missing fiscal targets. With headroom at less than 1% of total spending, even minor economic shocks—like a global trade war or rising borrowing costs—could force Reeves back to the drawing board.
The OBR’s revised forecasts provided temporary relief, but its assumptions drew scrutiny. While halving 2025 growth projections to 1%, the watchdog upgraded long-term GDP expectations by 0.2%, citing Labour’s planning reforms as a catalyst for 170,000 new homes and productivity gains.
However, economists questioned the OBR’s outlier optimism:
Productivity Pitfalls: If productivity growth aligns with the post-2008 average (0.7% vs. OBR’s 1.1%), Reeves would miss her target by £48 billion.
Trade War Threats: Donald Trump’s 25% auto tariffs and threats against the EU/Canada mirror the OBR’s “worst-case scenario,” which would erase the £9.9 billion buffer overnight.
“The chancellor will hope reality catches up with the OBR, not the other way around,” warned Resolution Foundation’s Ruth Curtice. “Otherwise, more tough choices await.”
Unlike the October 2024 budget—which triggered a gilts selloff—Reeves’ spring statement saw modest gains. Thirty-year gilt yields fell 9 basis points to 5.28%, while the pound held steady at $1.29. Investors appeared reassured by her commitment to fiscal rules, but the calm may be fleeting.
“Markets should brace for corrective action in the Autumn,” said Bloomberg Economics’ Dan Hanson. “The risks of another fiscal slip are uncomfortably high.”
Reeves’ welfare cuts sparked backlash within her party, with MPs labeling disability payment reductions “cruel” and “political.” Critics like Richard Burgon and Rebecca Long-Bailey argue the measures betray Labour’s core values, making further austerity politically toxic.
This unrest limits Reeves’ options. If external shocks materialize, tax hikes—not spending cuts—may become her only lever. Despite campaign promises to shield workers, she hinted at flexibility in Parliament: “The world is changing.”
With taxes already projected to hit 37.7% of GDP by 2028 (a post-1948 high), experts believe new revenue measures are inevitable. Options include:
Wealth or Inheritance Taxes: Targeting high-net-worth individuals.
Windfall Levies: Expanding taxes on energy giants or financial institutions.
Stealth Taxes: Freezing income tax thresholds to drag more earners into higher brackets.
Jefferies economist Modupe Adegbembo noted, “The government won’t be able to rule out tax rises next time. The fiscal math is too tight.”
Reeves faces another fiscal headache: boosting defense spending to 3% of GDP by 2030, up from 2.5% in 2027. This £20 billion commitment—driven by global instability—isn’t yet funded, threatening to devour her remaining headroom.
The current crisis echoes 2022’s Truss-Kwarteng budget debacle, where unfunded tax cuts spooked markets. While Reeves avoids ideological gambles, her reliance on optimistic forecasts mirrors Rishi Sunak’s 2023 strategy, which collapsed under inflation pressures.
“This is a can-kicking exercise,” said Oxford Economics’ Andrew Goodwin. “The OBR’s growth assumptions are out of step with reality.”
Rachel Reeves’ spring statement buys time but guarantees months of speculation. With the OBR’s credibility on the line and global risks mounting, Autumn’s budget could force Labour into a corner—choosing between fiscal discipline and its social democratic principles.
Comments
No comments yet. Be the first to comment!
Leave a Comment