Rachel Reeves is likely to be forced to raise taxes again, after the fiscal watchdog downgraded growth forecasts.
Last week the Office for Budget Responsibility (OBR) gave the Treasury the first official estimates on the state of the economy. It told the chancellor that the government’s £9.9 billion in “fiscal headroom” — spare money against its spending plans — had been wiped out by a combination of low growth, higher-than-expected interest rates and higher borrowing costs.
Details of the forecast, which were reported by Bloomberg, will increase pressure on Reeves before her spring statement on March 26. She has said she does not want to raise taxes and will focus instead on cutting spending. However, economists believe that she will need to raise more money if she is to meet her “iron-clad” fiscal rules.
Paul Johnson, director of the Institute for Fiscal Studies, said: “If, as seems likely, Reeves is missing her fiscal targets, then it’s going to be really hard to meet them by squeezing spending beyond already tight plans. The inevitable result will be that she’s forced into further tax rises. To meet her rules, those could be delayed until 2029.”
The chancellor has tried to strike a far more upbeat tone recently after six months of warning about the dire state of the public finances. She has made announcements, including on backing Heathrow, planning reforms, deregulation and benefits, which the government hopes will raise economic growth.
Many of the measures will take years to come to fruition. The official forecaster will not take into account the government’s plans to cut the benefits bill or changes to the planning regime because there is no evidence of their impact.
• Dominic O’Connell: When it comes to growth, Reeves’s plans just won’t fly
The Treasury began a leak inquiry after details of the OBR’s forecast were published. James Bowler, the permanent secretary at the Treasury, said: “It is important to put a ring around those forecasts and make sure they are not in the public domain. The OBR, ministers and officials need to interact with each other. As new information becomes available, they need to do that privately, so that would be a very serious and very unwelcome undertaking.”
Downing Street has sought to strike a more positive note, pointing to other organisations that had upgraded their forecasts for the economy.
The prime minister’s official spokesman said: “In recent weeks and months the OECD [Organisation for Economic Co-operation and Development] and the IMF [International Monetary Fund] have upgraded our growth forecast over the next three years. The government remains relentlessly focused on growth as the only way of sustainably raising living standards and delivering the investment that we need in our public services.”
In December last year, the OECD increased its forecast for growth in 2025 from 1.2 per cent to 1.7 per cent, while in January the IMF slightly upgraded its prediction to 1.6 per cent growth.
But last week the Bank of England halved its growth expectations for this year, suggesting the economy would expand by only 0.75 per cent before accelerating to 1.5 per cent in 2026 and 2027.
Mel Stride, the shadow chancellor, said reports of a downgraded OBR forecast showed that the government “needs to stop playing politics and come up with some serious solutions to the significant economic problems they’ve created”. He added: “With the Bank of England predicting growth falling and inflation rising, it is clear that this chancellor needs to make urgent course corrections before the damage she is doing to the economy becomes permanent.”
The latest GDP growth figures will be published on Thursday, covering the period to the end of last year, and will provide an indication of whether the economy expanded or contracted during Labour’s first six months in power.
