The UK faces the prospect of further tax rises later this year as Rachel Reeves grapples with what is being described as the “greatest energy security threat” of all time.
The Chancellor’s economic plans have been thrown into turmoil as a result of the conflict in the Middle East, which has spooked markets and forced borrowing costs up to their highest level since the financial crisis in 2008.
Economists are now warning that the impact of higher borrowing costs, the expected level of government support for consumer energy bills and higher inflation will blow a hole in the Treasury’s fiscal plans and increase the likelihood of more tax rises in the autumn Budget.
It comes as the head of the International Energy Agency warned that the conflict in Iran had already caused “the greatest global energy security threat in history”, adding that it could take six months or longer to restore oil and gas flows from the Gulf.
A protracted energy crisis of such a scale dramatically increases the likelihood of the Chancellor being forced to provide a support package for certain households, casting her fiscal plans in serious doubt.
Treasury sources insisted Reeves stood by her fiscal rules, describing her commitment to them as “ironclad, steadfast”, raising the chances of tax rises in the future to help balance the books.
Susannah Street, chief investment strategist of Wealth Club, said: ”Fresh tax rises do look possible at this stage given the Treasury is in an increasingly tight spot. With government borrowing costs rising to the highest level since 2008, it makes the challenge of balancing the books even harder.”
She added: “With the Government’s ability to trim spending curtailed by the threat of back bench revolt, ministers may be forced into another round of tax rises.”
The Institute for Fiscal Studies said higher inflation will mean increased welfare payments and greater pressure on public spending, while interest rate rises will risk further eating into the Chancellor’s headroom – how much she can afford to spend without breaking her promise to control the public finances.
Chief UK Economist Andrew Goodwin at Oxford Economics said there was a “substantial indirect risk” to the Chancellor’s headroom if she delivers on her pledge to deliver targeted support to households.
“If markets don’t like such a package – which would be likely given the current state of the public finances – then gilt yields will rise and the cost of servicing the government’s debts will increase, narrowing the headroom,” Goodwin said.
The comments were echoed by Willem Buiter, a former member of the Bank of England’s monetary policy committee, who told The i Paper there is “little fiscal space” for widespread energy support and the “markets would react badly”.
Ed Jones, professor of economics at Bangor University, said: “Unfortunately with any decision [to help with energy bills] there’ll be a cost involved to the public finances, but we don’t know the scale.
“In terms of tax rises, that seems to be the most logical way to pay for it. But any extra tax rises threaten economic growth further – and it’s already very slow at the moment.
“The government needs to think very hard on how to finance this,” he added.
Without knowing the size of energy support package, it is impossible to determine the cost of any such intervention.
But the £200 energy bill discount for all households in October 2022 was forecast by the Budget watchdog – the Office for Budget Responsibility – to cost the Government around £6bn, which is slightly less than a 1p increase to the basic rate of income tax would raise for the exchequer per year.
Reeves’s refusal to tweak her fiscal rules comes despite growing voices within the Cabinet calling for a softening of her borrowing rules in order to protect households from the looming energy crisis.
Reports emerged this week that Culture Secretary Lisa Nandy told the Cabinet this week that it was time to “rethink” the Government’s borrowing rules to fund a potential energy bills package. The fiscal trules dictate that Reeves can not borrow for everyday spending, while making sure the country’s debt is shrinking over time.
If Reeves ended up having to opt for more tax rises, it’s hard to say which levers she would pull – but some Labour MPs and party figures have previously pushed for a wealth tax of 2 per cent on assets valued above £10 million. Critics of wealth taxes argue that these can drive investment away from the UK.
The Chancellor has been considering reducing the energy profits levy but this is looking less likely.
Some MPs have also raised the prospect of revisiting “absurd” levels of benefit spending if the war derails the economy.
It comes as Fatih Birol, head of the IEA, who was at the centre of Europe’s response to the gas crisis in the wake of the Russia-Ukraine war, warned the Iran conflict had already caused the biggest global energy shock of all time.
“People understand that this is a major challenge, but I am not sure that the depth and the consequences of the situation are well understood,” he told the Financial Times.
Downing Street insisted that it was “far too early to say what sort of response is needed” to the energy crisis, adding that it was monitoring the situation.
“We know that families are worried about the impacts on their finances, and that’s why this government is facing working people’s corner,” the Prime Minister’s official spokesman said.
Hence then, the article about uk faces threat of tax rises over worst energy shock in history was published today ( ) and is available on inews ( Middle East ) The editorial team at PressBee has edited and verified it, and it may have been modified, fully republished, or quoted. You can read and follow the updates of this news or article from its original source.
Read More Details
Finally We wish PressBee provided you with enough information of ( UK faces threat of tax rises over ‘worst energy shock in history’ )
Also on site :
- U.S. accuses Iran’s government of operating hacktivist group that hacked Stryker
- King Alfred evacuated as fire crews battle blaze
- ‘The Comeback’ Incited Public Confusion While Recreating 2023 Strikes Outside WB Lot: “Cars Were Honking”