Rachel Reeves, who previously vowed not to adjust taxes before the general election, might find herself in a position where tax hikes become necessary, as highlighted by a prominent economist following the confirmation of the autumn Budget date.
Despite the Chancellor’s prior commitment to refrain from increasing income tax, national insurance contributions, or VAT, Mohamed El-Erian, the president of the Queens’ College at the University of Cambridge, suggested that a significant policy reversal could be on the horizon.
El-Erian emphasized that with the Budget set for November 26, the likelihood of tax increases has become nearly unavoidable. He explained, “When faced with fiscal challenges, there are limited options: either raise revenue, reduce spending, or increase borrowing.”
Given the government’s stance against further borrowing and the existing strain on public services alongside the need for increased defense spending, the possibility of resorting to previously dismissed tax adjustments seems increasingly plausible.
The Treasury’s financial predicament has been exacerbated by escalating borrowing costs, driven by concerns over the global economic landscape. The yield on 30-year UK government bonds soared to a 27-year peak of over 5.70%, before experiencing a slight decline.
With mounting government debt and recent costly policy reversals, experts now anticipate that tax hikes in the upcoming Budget are becoming more probable.
El-Erian warned on BBC Radio 4 that the UK is sensitive to global interest rate fluctuations, which could lead to a detrimental economic cycle impacting borrowing costs, revenue generation, and overall economic growth.
In a video statement, the Chancellor acknowledged the economic challenges faced by working individuals and expressed the need for change to improve the current situation.
As the country marks Labour’s achievements in its first year, the Chancellor reiterated the importance of addressing cost-of-living pressures and emphasized the necessity of maintaining fiscal discipline to reduce inflation and borrowing costs.
Ruth Curtice, from the Resolution Foundation, pointed out the daunting task ahead for the Chancellor in balancing the Budget, given rising debt interest costs and policy reversals, signaling a potential need for substantial fiscal adjustments.
Echoing similar sentiments, Health Secretary Wes Streeting emphasized the government’s commitment to stabilizing the economy and enhancing growth, underscoring the importance of prudent public spending.
Kathleen Brooks, a research director at XTB, highlighted the focus on the Budget amid concerns over plugging the nation’s fiscal gap, estimating it to be as high as £51 billion, which could lead to volatility in the UK bond market.
The ongoing scrutiny on Labour’s fiscal strategy and the expectations for addressing public sector spending will likely continue to impact bond market stability in the foreseeable future.