Speculation is mounting that the Chancellor may face a shortfall of as much as £30bn when she sets out her plans for tax and spend on 26 November, with the majority of the funding gap expected to be due to a revision in productivity growth by the Office for Budget Responsibility.
As such, Reeves is poised to blame looming tax rises on the 14 years of a Conservative-led government when she delivers her Budget later this autumn, The i Paper understands.
It is understood that for every 0.1 per cent downgrade in growth, around £9bn to £10bn is added to the funding shortfall, and Treasury officials fear the OBR could revise down its forecasts by 0.2 per cent.
‘Stealth tax’ could be extended
It has led economists to predict that she will be forced to extend the freeze on income tax thresholds – so called ‘stealth taxes’ – just a year after she pledged to raise them in line with inflation by 2028.
While Reeves will seek to claim that such a move, which would raise around £7bn a year, does not break her manifesto pledge not to raise income tax, national insurance or VAT for working people, it will be widely regarded as a hefty tax burden on working households as thousands of people will be drawn into higher tax brackets as wages rise.
UK inflation is set to be the highest in the G7 the OECD forecastsa Provider: PA WireThere are also calls for her to look at increasing capital gains tax, imposing a windfall tax on banks, while backbenchers on the left of her party are demanding she impose a full-blown wealth tax on the very richest people in the country.
The economic situation also raises questions over whether Reeves will be able to scrap the two-child benefit cap this year. The cap is hated by Labour MPs, and the government has indicated it would like to scrap it. But the £3.5bn cost may make it unaffordable in the short term.
UK growth could be hit by tax rises the OECD forecastsProvider: PA Wire
The UK is also expected to see one of the highest inflation rates among the G7 economies, according to its forecasts.
“Normally when we think about tax rises it’s also in the context of spending increases. This time we’re really talking about deficit reduction, so there won’t be an offsetting increase in spending, which means the impact on growth could be worse than normal,” explains Thomas Pugh, economist at RSM UK.
Food prices pushing up cost of living
Inflation in the UK is expected to reach 3.5 per cent in 2025, 0.4 percentage points higher than its previous forecast, and still remaining far above the Bank of England’s target in 2026, at 2.7 per cent, with soaring food prices pushing up the cost of living.
While the OECD nudged up its 2025 forecast for UK gross domestic product (GDP) from the 1.3 per cent it predicted in June, it kept the outlook unchanged for 2026 in what will mean a steep pull back in growth over the year ahead.
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She added: “But I know there is more to do to build an economy that works for working people – and rewards working people. That is what I’m determined we deliver through our plan for change.”
Shadow chancellor Sir Mel Stride said the OECD’s data showed “Britain is in a high tax, high inflation, low growth doom loop,” adding that the UK was “now teetering on the edge of stagflation”.
He added that growth was forecast to pick up this year while inflation was set to come down.
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