Rachel Reeves may use a financial review to launch £25bn in tax rises, as former Bank of England ratesetter Michael Saunders indicates, in a significant move to address the economic challenges inherited by Labour.
In her inaugural speech as Chancellor, Reeves announced an exhaustive evaluation of government spending and public finances, with the results to be disclosed before Parliament’s summer recess. Saunders anticipates that this review will present a bleak fiscal outlook, allowing Reeves to employ a ‘kitchen sink’ approach by front-loading fiscal setbacks to facilitate future corrective measures. Reeves asserted that Labour inherited the most challenging economic conditions since the Second World War from the Conservatives.
Saunders supports Reeves’ view, suggesting that the review is likely to recommend a combination of increased public expenditure, enhanced fiscal headroom, and more pragmatic fiscal tightening over the next five years. In a report for Oxford Economics, Saunders posits that Reeves will probably disclose the fiscal challenges early, enabling her to attribute the issues to prior Conservative administrations. This strategy resembles that of former Chancellor Jeremy Hunt, who adhered to fiscal regulations by scheduling approximately £20 billion in real-term cuts to unprotected government departments, maintaining a margin of £8.9 billion at the March budget.
Saunders believes Reeves could restore these budgets by implementing a blend of tax hikes and redefining government debt to exclude the impact of the Bank of England’s bond-selling process. This fiscal consolidation would appear more credible to financial markets and better align with Labour’s political objectives by reducing the squeeze on public spending. To create additional fiscal space, Saunders suggests that Reeves might amend the capital gains tax regime and curtail various tax reliefs, which currently cost the government £200 billion annually.
Nevertheless, Reeves and Prime Minister Sir Keir Starmer have pledged not to raise the main rates of income tax, VAT, and national insurance, which collectively account for over half of government revenue. This commitment suggests that any new tax measures will likely target lesser-known taxes that individually do not generate substantial revenue. Analysts also predict that Reeves might increase short-term borrowing to prevent austerity-style cuts to unprotected departments and partially finance a 5.5% pay rise for 1.9 million NHS and education workers. The Treasury has confirmed that officials are evaluating the state of government spending inheritance, with findings to be tabled in Parliament before the summer recess.
Reeves’ expected financial review indicates a probable £25bn in tax rises, marking a significant step by Labour to address deeply rooted economic challenges. By front-loading fiscal setbacks and exploring unorthodox revenue sources, Reeves aims to preserve public spending while meeting budgetary commitments.
