Rachel Reeves poised for £25bn tax rise, says former Bank of England ratesetter

Rachel Reeves, the Chancellor of the Exchequer, may use an upcoming review of public finances to introduce up to £25 billion in tax increases, according to Michael Saunders, a former member of the Bank of England’s monetary policy committee and current adviser to Oxford Economics.

In her inaugural speech as chancellor, Reeves announced a comprehensive evaluation of government spending and the public finances, with findings expected to be presented before Parliament’s summer recess. Saunders predicts that this review will offer a bleak fiscal outlook, allowing Reeves to adopt a “kitchen sink” approach by front-loading fiscal bad news to facilitate future corrective measures.

Reeves has claimed that Labour inherited the most challenging economic conditions since the Second World War from the Conservatives. Saunders supports this view, suggesting that the review will likely recommend a mix of increased public spending, greater fiscal headroom, and more realistic fiscal tightening over the next five years.

In a report for Oxford Economics, Saunders suggests that Reeves will likely reveal the fiscal challenges early, enabling her to blame previous Conservative administrations for the issues. This approach mirrors the strategy of the previous Chancellor, Jeremy Hunt, who met fiscal rules by scheduling approximately £20 billion in real-term cuts to unprotected government department budgets, leaving a margin of £8.9 billion at the March budget.

Saunders believes Reeves could restore these budgets by implementing a combination of tax increases and redefining government debt to exclude the impact of the Bank of England’s bond-selling process. He notes that such fiscal consolidation would be more credible to financial markets and align better with Labour’s political goals by reducing the squeeze on public spending.

To generate additional fiscal space, Saunders suggests that Reeves could amend the capital gains tax regime and reduce various tax reliefs, which currently cost the government £200 billion annually. However, Reeves and Prime Minister Sir Keir Starmer have pledged not to raise the main rates of income tax, VAT, and national insurance, which collectively account for over half of government revenue. This commitment implies that any new tax measures will likely target lesser-known taxes that individually do not generate substantial revenue.

Analysts also predict that Reeves might increase short-term borrowing to avoid austerity-style cuts to unprotected departments and partially fund a 5.5% pay rise for 1.9 million NHS and education workers.

The Treasury has confirmed that officials are assessing the state of government spending inheritance, with results to be presented to Parliament before the summer recess.

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Rachel Reeves poised for £25bn tax rise, says former Bank of England ratesetter