Reeves may have to find further cuts and tax hikes amid economic gloom

 

Reeves may have to find further cuts and tax hikes amid economic gloom

 

Rising costs and global uncertainty may force chancellor to turn to pensioners and wealthier taxpayers

 

Richard Partington and Jessica Elgot

Thu 27 Mar 2025 19.19 GMT

https://www.theguardian.com/politics/2025/mar/27/reeves-may-have-to-find-further-cuts-and-tax-hikes-amid-economic-gloom

 

Ministers may have to target pensioners and wealthier taxpayers at the autumn budget, as senior government figures voiced fears brutal welfare reforms would still not go far enough to tackle rising costs.

 

The Institute for Fiscal Studies warned the chancellor may be forced to consider a freeze on tax thresholds, hikes to capital gains and potentially pension taxes.

 

The thinktank said Rachel Reeves’ choices were extremely unpalatable in a “risky and changing world – as President Trump’s actions overnight on tariffs demonstrate all too well”.

 

MPs are expected to vote in the coming months on the government’s welfare green paper – with significant numbers of Labour MPs already on the brink of rebellion. New figures released on Thursday showed a record 4.5 million children are living in poverty in the UK.

 

However, some in government privately fear welfare may need further reform if benefit claims still continue to rise as the economy fails to improve.

 

The Treasury and the Department for Work and Pensions hope they will not have to revisit any major welfare changes after legislation is passed from Liz Kendall’s green paper. But further spending cuts are also likely to be difficult after the spending review concludes in June.

 

Reeves said in her interviews on Thursday morning after her spring statement, when asked about tax rises or future cuts, that she was “not going to write another four years’ worth of budgets at the spring statement” but repeated her promise not to raise taxes on working people.

 

Two government sources said despite the backlash on welfare there were still fears it had not done enough to reform the system – the DWP’s own impact assessmentsuggests that the caseload for personal independent payments will still grow substantially over the next five years by more than 750,000.

 

“Liz is going to have to demonstrate that this reform has gone far enough to truly change the fundamentals,” one senior government figure said. But another said it would be “deeply undesirable” for the government to have to return to make further welfare cuts.

 

On Thursday the senior Labour MP Stella Creasy became the latest to say she would not vote for the current package, saying: “I hope that they are listening to the concerns that people have on the backbenches. I hope they are willing to countenance alternatives.”

 

Reeves said she did not accept the reforms would drive more people into poverty – despite the government’s own impact assessments warning of a rise of more than 250,000 people in poverty.

 

“I am absolutely certain that our reforms, instead of pushing people into poverty, are going to get people into work,” she said. “That is our ambition, making people better off, not making people worse off.”

 

But the shadow chancellor, Mel Stride, has described the welfare cuts as “the worst of all worlds, a wholly inadequate level of savings on welfare with welfare costs still spiralling ever higher and changes that will be likely to harm many vulnerable people”.

 

The welfare reforms and spending cuts came as part of a £14bn package of measures to rebuild £9.9bn of headroom against her self-imposed fiscal rules, after a sharp deterioration in the public finances since the autumn.

 

It followed a steep rise in government borrowing costs on global markets, reflecting domestic factors but also the policies of the US president, Donald Trump, which have threatened to hit global growth and reignite inflation.

 

“There is a good chance that economic and fiscal forecasts will deteriorate significantly between now and an autumn budget,” the IFS’s Paul Johnson said. “If so, she will need to come back for more, which will likely mean raising taxes even further.”

 

However, Johnson warned the economic outlook was evolving rapidly, and that Reeves had left a historically slim margin of headroom against her rules which could be quickly erased.

 

“That risks months of speculation over what those tax rises might be – a raid on pensions, a wealth tax on the richest, another hike to capital gains tax?

 

“I mention those not to commend them, far from it, but to exemplify the kinds of taxes regarding which mere speculation about increases can cause economic harm. With no sense of a tax strategy, we have no idea which way the chancellor might turn,” he said.

 

The OBR said on Wednesday that its worst-case scenario for escalation in Trump’s trade war could wipe out the chancellor’s headroom entirely. As if to underline the uncertain outlook, Trump announced a punitive 25% tariff on all car imports to the US just hours after Reeves spoke.

 

As well as committing to “non-negotiable” fiscal rules – limiting the capacity for additional government borrowing – Labour pledged before the general election not to increase income tax, VAT or national insurance, and to hold the main rate of corporation tax on business profits at 25%.

 

Johnson said a fresh round of cuts would be difficult to make because Reeves was about to set out her plans in the June spending review, which would be tough to renegotiate. Further changes to welfare – after a political backlash to the spring statement plans – would also be challenging.

 

He said the “easiest” option for Reeves would be to extend a freeze on the personal allowances for income tax and national insurance, which could raise about £10bn for the Treasury.

 

Pensions could also be targeted, while capital gains tax could be reformed, which would affect wealthier individuals most. “One of the reasons I worry about pensions taxation is it looks like a nice juicy place to go for a lot of money,” he said.

 

Highlighting speculation before the last October budget, Johnson said that rumours about pensions taxation led individuals to make changes to their personal affairs – even though the chancellor did not follow through on them.

 

“Given that she didn’t do anything back in that budget, I really wish the chancellor had said ‘and I am not going to do anything for the rest of this parliament’, so I suspect we will have that speculation again.”