Has Rachel Reeves created a £50 billion fiscal black hole?

The Chancellor’s black hole is getting bigger and tax rises are coming. That’s the judgement of the National Institute of Economic and Social Research (NIESR) whose model of the UK economy has forecast she must find £50 billion of revenue or cuts if she’s to return to the £9.9 billion of fiscal headroom she left herself in the spring.  

Reeves’s self-imposed and ‘ironclad’ fiscal rules require her to abolish the deficit by the end of the Office for Budget Responsibility’s (OBR) five-year forecast. NIESER’s model says Reeves is now £41.2 billion short of that goal thanks to weaker GDP forecasts and productivity growth as well as poorer than expected tax receipts thanks to the wealthy fleeing the country or sitting on assets rather than moving them around the market. Add in a £9.9 billion buffer – almost the smallest any Chancellor has ever given themself – and you get to the £50 billion figure.

Another part of the problem, according to NIESER, is government spending is up £14 billion compared with spring and a succession of U-turns on welfare and winter fuel will cost another £15 billion.

Reeves finds herself with an ‘impossible’ choice of cutting spending, significantly raising taxes or both if she is to balance the country’s books. Labour’s backbenches have shown they are not prepared to wear spending cuts that are aimed at pleasing the OBR so tax rises are the only option. It’s likely those hikes will include so-called ‘sin-taxes’ on booze and fags as well as stealth taxes such as continuing the freeze on income tax thresholds that drags low-income earners into paying tax.

NIESR’s figure seems a bit on the high side, but most other forecasts still put the fiscal hole at around £20 billion – enough to make tax rises inevitable. Some now believe the gap is so large Reeves may have to break Labour’s manifesto pledge not to increase income tax, VAT or employee national insurance. Reeves will be desperate to avoid that, but the idea that stealth hikes, sin taxes, or a £25 billion raid on employer national insurance would not hit working people was always fanciful.