The Prime Minister refused to rule out interventions to reduce government borrowing at the spring statement next month – but insisted that a repeat of the major tax increases seen at the Budget is off the cards.
Reeves has promised that her spring statement delivered on the same day will not be a full-blown “fiscal event” with comprehensive changes to the existing tax rules and public spending regime.
Asked during his trip to Washington whether he could rule out higher taxes or cuts to spending, Starmer said: “Well we are at the early stages of that, and obviously I am not going to get ahead of myself until we have made decisions.
At the Budget in October, Reeves courted controversy by unveiling a significant increase to the rate of national insurance paid by employers, as well as imposing inheritance tax on farmland which was previously exempt.
But economic growth has proven to be weaker than expected by the OBR, with inflation running higher – which tends to suggest that borrowing is likely to increase.
A first draft of the OBR’s March verdict is reported to show that the headroom has been wiped out entirely, which would require higher taxes or lower spending to compensate.
Back Europe on Putin and meet the King: Starmer’s Trump card
Read MoreRob Wood, economist at Pantheon Macroeconomics, said: “Higher market interest rates have likely wiped out Chancellor Reeves’s headroom against her fiscal rules.
“She will not have to raise taxes again next month. If she did need to raise more tax revenue, I suspect Reeves would free income tax thresholds for longer, out to 2030 rather than raise tax rates now.“Looking further ahead than the next fiscal event, this and future UK governments will inevitably have to raise taxes further over the next 5 to 10 years and beyond. The government debt trajectory already required 1 per cent of GDP tax hikes every ten years until the middle of the century, or equivalently spending cuts or productivity gains.“Defence spending will have to rise above 2.5 per cent of GDP, putting further pressure on the rest of the Budget. I would be surprised if the Government were able to limit defence spending to 2.5 per cent of GDP this Parliament. But that issue is for a future Budget, not the March fiscal update, which will assume defence spending of 2.5 per cent GDP is funded by reduced overseas development aid.”
According to economic forecasters and analysts Capital Economics, the rises in rate expectations and gilt yields since the Budget in October 2024 to 12 February suggest that the Chancellor’s headroom of £9.9bn at the time of the Budget may have been reduced to just under £3.0bn. And this is before the OBR factors in the recent weakness in economic activity.
Changes Reeves could make in spring statement
By Robert Salter, director at Blick Rothenberg
The freeze on the income tax bands could be extended until April 2029 (they are presently frozen until April 2028). Freezing the bands is not directly a tax rise, but it is already creating significant additional revenues for the Government through fiscal drag and freezing the rates for another year would only increase this revenue raise. If they are kept frozen, it is predicted thousands of pensioners will be dragged into paying income tax for the first time. Reducing the ISA limits – particularly the cash ISA limit – down to £4,000 or £5,000 per annum. If this happens, Reeves will likely sell it as something which doesn’t impact the great majority of taxpayers. This is on the basis that only a relatively small percentage of taxpayers actually put in more than £4,000 or £5,000 per annum into an ISA anyway. However, banks and building societies have come out against the changes, arguing they will have a detrimental impact on people being able to save. Cancel the lifetime ISAs – at least on a going-forward basis. There are already arguments for this as people can only buy a property worth up to £450,000 with the ISA, a limit that has remained the same since 2017. Many argue it is impossible to buy a home for this price, especially in cities. Rather than reducing the headline employee national insurance contribution (NIC) rates, she could perhaps look at extending the scope of NICs. For example, employee NICs could be imposed on benefits-in-kind which are goods and services provided to an employee for free or at greatly reduced costs. Currently, it is presently only chargeable on cash earnings for employees and employee company share option/stock events. However, there is already a move to have benefits-in-kind reported via the payroll in all cases going forward and this would therefore fit quite naturally with imposing employee NICs on such benefits. Given that she has imposed VAT on private school fees, she could look at widening the scope of VAT. For example, VAT could arguably be imposed on areas such as private healthcare or the VAT on school fees could be widened (e.g. to nursery or university education too). After all, universities and nurseries are typically privately run charities or for-profit institutions – so broadly akin to private schools. Introducing NIC on employer pension contributions (these are presently not liable to NIC). Tightening the rules on personal service companies (i.e. companies owned by an owner/director). These firms can decide whether to pay the owner and/or director a salary or dividends (or a combination of these) to retain funds in the business and pay them out via capital gains in due course (i.e. when the business is sold). These options do generally provide the owner-director with a relative tax win compared to someone doing business, for example, directly as a self-employed individual. While this change would be controversial, there are other countries which do – at least to some degree – look through the personal service company (and limited liability/separate legal personality which comes from a limited company structure), when it comes to assessing the owner’s tax position. Raising corporate tax rates (though the Treasury has previously stated that it would not do this). Reducing the 25 per cent tax-free element that one can take from a pension fund on retirement. This could prove controversial, as it is probably the most well-known bit about pensions for the average taxpayer. Plus more people need to be saving for retirement and this could damage trust and sentiment in the system. Read More Details
Finally We wish PressBee provided you with enough information of ( Starmer hints Reeves could raise taxes again at spring statement next month )
Also on site :