Future Retirement Success
  • Politics
  • Business
  • Investing
  • Stocks
  • Politics
  • Business
  • Investing
  • Stocks

Future Retirement Success

Business

Reeves faces tough choices as fiscal headroom vanishes, raising tax hike fears

by February 12, 2025
February 12, 2025
Reeves faces tough choices as fiscal headroom vanishes, raising tax hike fears

Chancellor Rachel Reeves has exhausted the £9.9bn borrowing buffer she had set aside, potentially forcing her to raise income tax to cover unexpected economic shocks, economists have warned.

The National Institute of Economic and Social Research (Niesr) has said sluggish growth and rising interest rates have already wiped out the Treasury’s fiscal headroom, even before the full economic fallout from Donald Trump’s potential trade war is factored in.

“Our forecast indicates that zero fiscal headroom remains as the current Budget is exactly balanced at the end of the forecast period,” Niesr analysts stated, cautioning that without tax rises or spending cuts, the Government has no buffer to absorb unexpected economic disruptions.

Reeves has pledged to borrow only for investment and to reduce debt as a share of GDP, while ruling out increases to income tax, VAT, or National Insurance contributions paid by workers. However, she has already raised employer contributions by £25bn in her maiden Budget.

With Britain’s tax and spending watchdog, the Office for Budget Responsibility (OBR), cutting growth forecasts and confirming that fiscal headroom has vanished, pressure is mounting on the Chancellor to either find new revenue sources or cut spending.

Niesr’s interim director, Stephen Millard, said that Reeves must be prepared for difficult decisions: “The Chancellor needs to appreciate that there are circumstances in which taxes might have to go up. If you are committed to fiscal rules and a shock hits the economy, to maintain those rules you may have to increase taxes.”

Reeves has acknowledged the political stakes, warning that Labour risks losing the next election if voters see no tangible improvements. Speaking on The Political Party podcast, she said: “At the next election, if people still find it hard to get a doctor’s appointment and they’re no better off, they are going to kick us out like they kicked the last lot out.”

A potential global trade war triggered by Trump’s proposed tariffs could exacerbate Britain’s economic challenges.

Niesr estimates that US duties—along with retaliatory measures from other countries—could shave 0.25 percentage points off UK GDP growth this year and next. In 2025, this could mean growth of just 1.25% instead of 1.5%.

At the same time, economists estimate that inflation, which hit 3.2% in January, will continue to fall throughout the year. However, tariffs could add an additional 0.4 percentage points to the headline inflation rate, pushing price rises further from the Bank of England’s 2% target.

Millard urged the UK government to resist retaliating against US tariffs, particularly on steel, warning that such measures would be self-defeating: “Steel is an important input into production. You are almost kicking yourself by making imported steel more expensive. I don’t think there would be that much of a gain, and potentially you are raising your own costs.”

Millard also questioned whether Labour’s self-imposed fiscal rules were the right approach, suggesting they were an arbitrary target rather than a measure of genuine economic sustainability: “This is an arbitrary rule that the Chancellor has set herself. Has it got anything to do with long-term fiscal sustainability, really?”

Despite government borrowing and spending helping to prop up growth, Niesr predicts GDP will rise by just 1.5% this year—well below the OBR’s October forecast of 2%. Other analysts are even more pessimistic. Capital Economics now expects GDP to edge up by just 0.5%, down from its previous 1.3% estimate, citing “higher taxes for businesses, a lingering drag from previous interest rate hikes, and softer overseas demand.”

Meanwhile, Treasury Chief Secretary Darren Jones defended the Government’s economic strategy, insisting Labour is focused on “kickstarting economic growth.” He highlighted investment in infrastructure and housing, including plans for 1.5 million new homes, Heathrow’s third runway, and the Oxford-Cambridge Growth Corridor, which could add up to £78bn to the UK economy.

As fiscal pressures mount and economic risks escalate, Reeves faces a difficult balancing act—delivering growth without breaking her tax pledges or fiscal rules.

Read more:
Reeves faces tough choices as fiscal headroom vanishes, raising tax hike fears

0
FacebookTwitterGoogle +Pinterest
previous post
Tips for the Year Ahead on Managing Your Business
next post
Trump’s trade war with Europe ‘about to get nasty’ as EU prepares retaliation

You may also like

Investors retreat from sterling ahead of spring statement...

March 25, 2025

TPP is stet to revolutionise investment landscape

November 22, 2023

Joey Miller, New Braunfels Financial Advisor Navigating the...

December 22, 2024

5 Business Grants in The UK To Make...

October 18, 2023

Uber’s ex-security chief faces landmark trial over data...

September 7, 2022

Amazon invests in the UK’s largest e-HGV fleet,...

January 14, 2025

British start-up wins £1m AI prize for breakthrough...

March 20, 2025

Customer service? Quick and clear communication with a...

November 30, 2023

Alabama’s Christopher Linton on Leadership, Community, and Empowering...

October 19, 2024

Neko Health co-founded by Spotify chief executive Daniel...

July 6, 2023

    Get free access to all of the retirement secrets and income strategies from our experts! or Join The Exclusive Subscription Today And Get the Premium Articles Acess for Free

    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Chief Justice Roberts sounds alarm on dangerous rhetoric aimed at judges from politicians

      June 29, 2025
    • Britain’s fastest-growing firms revealed for 2025: Dfyne, Nala’s Baby and Hawkstone lead the charge

      June 29, 2025
    • Schumer to force Senate reading of Trump’s entire ‘big, beautiful bill’

      June 28, 2025
    • Rubio condemns Iran’s ‘unacceptable’ threats against IAEA director

      June 28, 2025
    • Key blue state Republican says Senate’s local tax write-off offer is a ‘good deal’

      June 28, 2025
    • Key GOP senator defects on crucial vote, imperiling Trump’s ‘big, beautiful bill’ in narrow majority

      June 28, 2025

    Categories

    • Business (8,330)
    • Investing (2,081)
    • Politics (15,852)
    • Stocks (3,177)
    • About us
    • Privacy Policy
    • Terms & Conditions

    Disclaimer: futureretirementsuccess.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2025 futureretirementsuccess.com | All Rights Reserved