Tax rise fears grow as ‘High Street woes start to hit public finances’ in new blow to Rachel Reeves
Concerns are mounting that Chancellor Rachel Reeves may be forced to hike taxes or cut public spending as economic challenges on the High Street begin to impact the UK’s public finances. Despite a record government borrowing surplus of £15.4 billion in January—the highest since 1993—the figure was still £5.1 billion lower than forecast by the Office for Budget Responsibility (OBR). This shortfall means the government has had to borrow more than expected, adding pressure to an already strained fiscal environment.
For the first 10 months of the financial year, the Labour government has borrowed £12.8 billion more than the OBR predicted. Economists warn that weaker-than-expected economic growth, higher inflation, and rising borrowing costs could force Reeves into difficult decisions to meet her fiscal rules. Cara Pacitti, senior economist at the Resolution Foundation, noted that while January typically sees a boost in tax receipts as people file their returns, broader tax revenues for the financial year so far are £4.6 billion lower than expected. She warned that this could leave Reeves in the “unenviable position” of needing to raise taxes or cut spending to stay on track.
Isabel Stockton, senior research economist at the Institute for Fiscal Studies, echoed these concerns, pointing out that while the government has promised fiscal restraint in the future, it remains unclear whether this will be enough to meet its “non-negotiable” fiscal rules without further tax hikes or tighter spending plans.
Reeves has already faced criticism for her autumn Budget, which included £40 billion in tax rises, £30 billion more in borrowing, and £70 billion in additional public spending aimed at reviving struggling public services like the NHS. However, business leaders have warned that a £25 billion increase in employers’ National Insurance contributions, dubbed a “job tax,” combined with a rise in the National Living Wage to £12.21, is forcing companies to reduce their workforce. This could further dampen economic growth and exacerbate the government’s fiscal challenges.
On a slightly positive note, retail sales saw an unexpected boost in January, with volumes jumping 1.7%, driven largely by a sharp increase in food sales. However, this good news is unlikely to offset the broader economic pressures facing the government.
Chief Secretary to the Treasury Darren Jones has sought to reassure the public, stating that the government is “committed to delivering economic stability and meeting our non-negotiable fiscal rules.” He emphasized that the government is scrutinizing every pound spent to ensure it aligns with the country’s priorities. However, economists remain skeptical. Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, warned that pressures to increase defence spending are intense, and the government may need to go beyond its current target of 2.5% of GDP. This could necessitate further tax increases in the Autumn Budget.
The Office for National Statistics (ONS) also reported increased spending on public services, benefits, and debt interest since January 2024, adding to the fiscal strain. As the government prepares for the OBR’s next forecast on March 26, the question remains: will Reeves be able to balance the books without resorting to unpopular tax hikes or spending cuts? For now, the outlook is uncertain, and the Chancellor faces a tough road ahead in maintaining economic stability while meeting her fiscal commitments.
