Rachel Reeves will raise taxes by up to £16 billion in the autumn Budget to avoid inflicting austerity cuts on Britain’s public services, economists are predicting.
They believe the Chancellor may hike inheritance tax, capital gains tax, and tax on pensions, by scaling back relief for higher earners.
They issued the warning as the new Government faced another grim set of official figures showing borrowing higher than expected.
Borrowing rose to £13.7 billion last month, marking the third highest August on record, driven by higher spending on public services due to increased running costs and pay increases.
The increase means public sector debt hit 100 per cent of gross domestic product (GDP) at the end of August 2024.
The figure, which excludes public sector banks, means national debt is at levels last seen in the early 1960s, the Office for National Statistics said.
As the October 30 Budget looms, Rob Wood, chief UK economist at Pantheon Macroeconomics, stressed that Ms Reeves will need to spend more than the one per cent year-over-year real public spending increases which had been pencilled in by her predecessor Jeremy Hunt.
Mr Wood emphasised that this would have “translated into implausible 2.3 per cent a year real terms cuts” outside of the protected health, education and defence budgets.
“We expect the Chancellor to respond with tax hikes of £10 bn a year from 2025/26 in the October 30 Budget, focusing on capital gains, inheritance tax and pensions tax relief,” he said.
“We think Ms. Reeves will boost spending by a similar amount but still hit her fiscal rules by targeting overall debt falling relative to GDP in five years, rather than excluding the Bank of England.”
Alex Kerr, UK Economist at Capital Economics, said: “August’s public finances figures continued the recent run of bad news on the fiscal position, with public borrowing on track to overshoot the OBR’s (Office for Budget Responsibility) 2024/25 forecast of £87.2bn by £6.2bn.
“And although the OBR may hand the Chancellor more headroom against the fiscal rules at the Budget on 30th October, we expect her to fully fund the planned £16bn increase in spending in 2024/25 by raising taxes rather than borrowing.”
The £13.7 billion borrowing total for August was more than the £11.2 billion forecast by Britain’s official forecaster, the OBR, and more than the £13 billion most economists were pencilling in.
ONS chief economist Grant Fitzner said: “Central Government tax receipts grew strongly, but this was outweighed by higher expenditure, largely driven by benefits uprating and higher spending on public services due to increased running costs and pay.”
Chief Secretary to the Treasury Darren Jones said: “When we came into office, we inherited an economy that wasn’t working for working people.
“Today’s data shows the highest August borrowing on record, outside the pandemic. Debt is 100 per cent of GDP, the highest level since the 1960s.
“Because of the £22 billion black hole in our public finances we have inherited this year alone, we are taking the tough decisions now to fix the foundations of our economy, so we can rebuild Britain and make every part of the country better off.”
One report on Friday, though, suggested that the Chancellor may face less pressure to raise taxes as the Bank of England slows the pace of reversing the emergency quantitative easing carried out in the financial crisis by selling off bonds, which could give the public finances a £10 billion boost.
The Government’s recent decision to restrict winter fuel payments to only those on pension credit is among the “tough decisions” Ms Reeves has said she will have to make in October, as part of an effort to plug the spending gap.
The Institute for Fiscal Studies had warned that neither main party was being fully upfront with voters ahead of the July 4 General Election about the scale of the crisis in the public finances and that taxes would almost certainly have to rise.
But the leading economists accepted that some of the financial shortfalls in the public finances were not known by Labour before it took power.
Tory MPs, though, have criticised the new Government for agreeing pay rises for public sector workers costing around £10 billion while restricting winter fuel payments to only those receiving pension credit.
