More tax hikes loom as Rachel Reeves scrambles to fix Britain's sluggish economy after gloomy Spring Statement

03/27/2025 04:29 AM

RACHEL Reeves today declined to rule out a fresh bout of punishing tax hikes after growth forecasts were slashed and forced the Chancellor into £14 billion of spending cuts.

GDP will go up by just one per cent this year, obliterating the government's £9.9 billion financial cushion amid warnings of a fresh rise in inflation.

It significantly increases the likelihood of further spending cuts or tax hikes at the next Budget to stay within her “fiscal rules”.

Put to her on Times Radio that this was now inevitable, Ms Reeves this morning insisted: "No, it's not."

But when pressed, she repeatedly declined to rule out more tax rises and spending cuts in the autumn. 

Betting the house on driving growth, she said: "If we go further and faster on delivering economic growth with our planning reforms, with our pensions reforms, with our regulatory reforms, we can both grow the economy and have more money for our public services. And that is what I’m focused on."

In announcements at yesterday’s Spring Statement:

• No new tax rises: The Chancellor ruled out further tax hikes and pledged to crack down on tax avoidance, aiming to raise an extra £1billion.
• Growth downgraded for 2025: The OBR halved its GDP growth forecast for next year from 2% to just 1%.
• Growth boost from planning reforms: New housing policies expected to raise GDP by 0.6% over the next decade.
• Housebuilding surge: 1.3 million homes expected over five years, with construction hitting a 40-year high.
• £2.2billion extra for defence: Additional funding confirmed to help meet the 2.5% of GDP defence target.
• £400million Defence Innovation Fund: Backing new tech like drones and AI for the front line.
• Welfare shake-up: Targeted employment support and welfare reform to reduce benefit spending.
• Civil service cuts: New voluntary exit schemes and AI tools to shrink Government.

Ms Reeves is on the ropes after the Office for Budget Responsibility yesterday halved the UK's annual growth forecast from 2 per cent to 1 per cent.

Britain's spending watchdog also grimly predicted another 0.6 per cent blow to the economy this year if Donald Trump slaps the UK with 20 per cent tariffs next month.

They also warned the government's plans to offer European style labour protections risks crippling business and will likely have a "net negative" impact on growth that has not yet been fully war-gamed.

Last night the Employment Rights Bill that is still working through Parliament was branded “an unexploded bomb” under the economy that could yet knock the Treasury deep into the red.

In a withering assessment of the state of the nation's finances the Office of Budget Responsibility warned it was a coin toss as to whether Reeves will have to hike taxes again in the autumn after last year's crippling £40billion raid.

While the Chancellor blamed instability around the world, critics accused her of snuffing out growth with her high tax high spend splurge last year – with warnings she will come up short again in the Autumn.

Economists at the IFS warned yesterday's Spring Statement opens the door to "six months of damaging speculation and uncertainty over tax policy”.

Their director Paul Johnson added that the Chancellor is now at the "mercy of events" after restoring the £9.9 billion of headroom that was wiped out by sluggish growth through cuts to Whitehall and the benefits bill.

He said: “There is a cost, both economic and political, to that uncertainty. The Government will suffer the political cost. We will suffer the economic cost.”

Asked last night if she was considering more tax rises, the Chancellor side stepped the question saying only “I’m not going to write four years of budgets."

She added: “But I think you can see through this spring statement how determined I am, how determined this government is, to live within the means that we set ourselves in the budget last year and to grow our economy because that is the way to sustainably improve living standards and have the money that we need for our public services.”

Ministers are now scrambling to cut a deal with the United States to exempt Britain from the White Houses export tax hike due to come into force in days.

A planned tax on tech firms could be softened in a bid to placate Mr Trump who has so far refused to spare the UK.

The US President is poised for 'liberation day' where he will slap import duties on foreign products, with Ms Reeves warning the world is "changing before our eyes".

But hinting at a deal with Mr Trump, she added: "Lets see where we get to in the coming weeks”.

In the most severe scenario, the Office for Budget Responsibility says the tariffs would see GDP hit by 0.6 per cent this year and another one per cent next year only if the UK retaliated.

If there is no counter-action, GDP will be 0.4 per cent lower than expected this year and 0.6 per cent lower next year.

Downing Street has refused to rule out that the Digital Services Tax – that hits tech firms for two per cent – could be jettisoned as part of negotiations.

But even before that, Ms Reeves faced a £14 billion headache as her £10 billion headroom surplus was reduced to a £4.4 billion deficit.

Amid a dire economic forecast, the Chancellor swung the axe at Britain’s bloated welfare bill – shredding it by £3.4billion.

But Labour MPs are up in arms after the government's own official impact assessment warned those changes risked plunging a 250,000 into poverty.

Giving their bi-annual update, yesterday was a bitter blow to the Chancellor, after the OBR downgraded its economic forecast for 2025 from 2 to an anaemic 1 per cent.

The economic watchdog warned inflation is set to go up, with figures averaging 3.8 per cent in July this year before falling to 2.1 per cent in 2026.

The unemployment rate is also forecast to rise, reaching 4.5 per cent in 2025, up from 4.3 per cent in 2024.

Meanwhile, Britain’s budget deficit will remain high at 4.8 per cent of GDP in 2024-25 before falling to 2.1 per cent by 2029-30.

They predicted that the measures announced in the Spring Statement will result in Treasury coffers achieving a surplus of £6bn in 2027-28 and £9.9bn in 2029-30.

But those figures do not take into account new red tape coming down the track for employers rendering the growth forecasts shaky at best.

The OBR said regulations which "affect the flexibility of businesses and labour markets" are likely to have "material and probably net negative, economic impacts on employment, prices, and productivity".

They said they have not yet been able to take account of the Employment Rights Bill in their forecasting as there is not enough detail available on the policy.

They warned: "So altering, for example, the ability of employers to ask people to be flexible with the hours that they work …. it's hard to see that as anything other than a possibly mild negative on employment."

Shadow Business Secretary Andrew Griffith warned the measures are an “unexploded bomb” planted under the economy as the Tories urged for the bill to be ditched.

Meanwhile in a glimmer of good news, house-building will hit a 40-year high.

Ministers' planning reforms will also permanently increase levels of real GDP – but only by a meagre 0.2 per cent, translating to £6.8bn, by 2029-30.

Ms Reeves also put all government departments on notice of painful cuts this year, eyeing up £6 billion of cuts.

Addressing the mega size of Whitehall, Ms Reeves insisted “we can make our state leaner, and more agile, delivering more resources to the frontline.”

She confirmed tens of thousands of back office civil service jobs will go, leading to £3.5bn of day-to-day savings by 2029-30.

A £3.25 billion Whitehall "transformation fund" will be used to pay off failing civil servants.

Cutting edge technology will also increase the number of tax fraudsters charged each year by 20 per cent and add £1bn to Treasury coffers.

But the Tories branded the Chancellor a dangerous gambler who had bet the house on growth and lost.

Shadow Chancellor Mel Stride accused Ms Reeves of having “reneged” on her pledges to Brits.

He slammed his opposite as a “gambler” who “destroyed” livelihoods and “clobbered” businesses.

Mr Stride said: “At the last budget Ms Reeves said she would bring stability to the public finances but this statement, more appropriately referred to as an emergency budget, has brought her to a cold, hard reckoning.

"The Chancellor says of course that none of this is her fault, that it’s the war in Ukraine, it is President Trump, it is tariffs, it is President Putin, it is the Conservatives, it is legacy, it is anybody but her.

“But what the British people know is that this is a consequence of her choices.

“She is the architect of her own misfortune: it was her who talked down the economy … so that business surveys and confidence crashed through the floor.”