Paul Johnson said there’s “better than 50/50 shot that there’ll be tax rises” in the next budget. (Alamy)
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Paul Johnson, director at the Institute for Fiscal Studies, has said there is “more than a 50/50 chance” of tax rises in the Autumn following next week’s Spending Review, adding that they could be “significant”.
Johnson told PoliticsHome that the government faces being “forced into a corner when it comes to tax increases”.
Chancellor Rachel Reeves will use a House of Commons statement on Wednesday to set out the Labour government’s spending plans.
The review is being seen as a major moment for the Keir Starmer administration, as it will provide clear signs of the government’s priorities between now and the next general election.
There have been warnings that some departments face real-terms cuts as the government tries to stick to its fiscal rules, with Reeves this week warning that not all parts of Whitehall will “get everything they want” in their spending packages.
“I have had to say no to things that I want to do too,” the Chancellor said during a speech in Manchester earlier this week.
Ministers are heading into the Spending Review facing acute economic challenges.
The government has committed to increasing defence spending to 3 per cent of GDP in the next decade, to respond to what is widely seen as an increasingly dangerous international context, and may be forced to raise the commitment to 3.5 per cent in the coming weeks.
At the same time, Starmer is under political pressure, not least from many of his own Labour MPs, to spend money on public services and tackling poverty.
Heading into the Spending Review, the government has already announced that it will spend £15bn on transport projects in the North, the Midlands and the West of England, and extend free school meals to all children whose parents receive Universal Credit.
As the government tries to balance political pressures with sticking to its fiscal rules, Johnson said there was “better than 50/50 shot that there’ll be tax rises” in the Autumn Budget.
This, Johnson said, is because ministers are “very, very close to not meeting their fiscal rules”, with low economic growth and rising borrowing costs putting pressure on spending plans.
“Rachel Reeves has been incredibly clear that those [fiscal rules] are ironclad and sacrosanct, so there is at least a 50/50 chance… the fiscal rules will be missed,” he said.
The Chancellor’s fiscal rules include having debt falling as a percentage of GDP by 2029/30, and for the government’s day-to-day spending to come from tax revenue and not borrowing.
“If they’re missing the fiscal rules, then it’ll be a very difficult political judgment not to do something [on tax or spend]. They’ll pretty much be forced to, and given that they will have done the Spending Review, there won’t be a lot of choice.”
“Obviously, there’s a judgment about which tax to increase,” he added.
“They could make the judgment to slash pensions or welfare, but that’s extremely unlikely.
“They’re probably forced into a corner when it comes to tax increases.”
Johnson added that if the Office for Budget Responsibility, which provides independent analysis of the government’s economic plans, makes “big changes” to its forecasts, then possible tax rises later in the year could be “reasonably significant”.
Turning to the Spending Review itself, the economist said that while it would likely result in cuts for unprotected departments like justice, it would be incorrect to label it as austerity.
“This isn’t [austerity],” he told PoliticsHome.
“As Rachel Reeves points out repeatedly — but it is true — spending will be rising, and there were increases this year… In the last parliament, we saw some quite big rises, and average spending overall will be increasing rather than falling.”
However, he added that while cuts to unprotected departments will be “relatively modest”, it will still feel “quite difficult” for those affected as they are already “struggling.
