Chancellor may be forced to spring more tax hikes on the public in this month's Budget after a spate of unconvincing economic data, City analysts warn.
Chancellor Rachel Reeves may have no choice but to raise taxes again in this year's Spring Budget, according to City analysts.
Economists think growth forecasts compiled by the Office for Budget Responsibility (OBR) are overly optimistic, given recent poor economic figures.
The OBR previously projected in October that the economy would grow by 2% in 2025.
However, according to the latest private sector forecasts compiled and published by the Treasury, economists now expect growth of just half that figure this year.
UK Gross Domestic Product (GDP) is estimated to have grown by 0.1% in the fourth quarter (October to December) 2024, following no growth in the previous quarter.
The services sector grew output by 0.2% during Q4, while construction also grew by 0.5%, but production fell by 0.8%, according to figures from the Office for National Statistics.
Weak productivity could be costly
A key issue could be weak productivity growth.
The OBR currently forecasts that output per hour work – a measure of employees' productivity – will grow by 0.9% in 2025 and 1.1% in 2026.
However, analysts in the private sector are predicting growth of just 0.6% and 0.9%.
According to Oxford Economics, each 0.1% cut to productivity costs the Chancellor £7 billion, so growth that was 0.3% lower would translate into a £21 billion hole in Reeves' Budget this year.
“A downward revision to the OBR’s potential growth forecast for 2025-2029 to match the consensus could require the Government to implement roughly £20 billion of fiscal tightening if it wishes to keep fiscal headroom at £9.9 billion," Michael Saunders, a former member of the Bank of England’s Monetary Policy Committee, told the Telegraph.
Reeves: No choice but to raise taxes
The Treasury had previously insisted there would be no further tax changes in the Spring Budget, which will be delivered on 26 March.
“We are never going to need a Budget like this again,” Reeves told a Treasury Committee meeting in November, adding she would not increase taxes again in this parliamentary cycle.
However, the Chancellor may now be forced to sign off further tax increases.
“Rachel Reeves said in December she ‘remained committed to one major fiscal event a year', but the OBR’s Economic and Fiscal Forecast, which will be published at the Spring Statement, may well force the Chancellor to announce further tax rises in addition to expected spending cuts," said Neil Insull, a partner at the tax advisory firm Blick Rothenberg.
“Lower growth projections in the OBR report will cause further jitters in the already nervous bond market and it will be no surprise if the Chancellor looks to raise tax revenues to meet her ‘fiscal rules’."
Business likely to be insulated from any hikes
Insull suggested the chancellor is unlikely to consider further tax hikes on businesses.
“She’s already delivered a bloody nose to UK employers in her Autumn Budget through a £25 billion annual increase in employers’ National Insurance Contributions (NIC), with a disproportionate burden being faced by employers with lower paid workers in the hospitality and retail sectors.
"It would not only be economically more difficult to ask businesses to pay more tax but it would almost certainly be viewed as a political own goal.
What's more, it's possible she may even have to reverse some tax-raising initiatives she has already put in place, said Insull.
“Rachel Reeves has the opportunity to learn from the Budget and even seek to reverse some of the changes that will come into effect in April.
"While it seems certain that the employers NIC rate will increase to 15%, a reversal of all or part of the reduction in the threshold at which employers pay NIC would be hugely welcomed, particularly for the high street, at a time when the National Living Wage is increasing and the promised cut in business rates will not come through until 2026.”
However, Insull think it's unlikely the Chancellor will drastically change her previous fiscal decisions.
“It is extremely difficult to see the Chancellor divert from Budget announcements in any significant way, particularly after publishing the Corporate Tax Road Map, which emphasises the importance of fiscal certainty.
"The publication has been generally been applauded in the business community, albeit mainly by larger corporates who see the UK economy in competition with the rest of the world for their ‘business’.”
'Painful sequel' to Autumn Budget
Previously, in January, Deutsche Bank said it was expecting a “painful sequel” to Labour's Autumn Budget last year, as it forecast growth would dip below the Office for Budget Responsibility’s (OBR) October projections.
The financial markets were previously pricing in two interest rate cuts for 2025, but City traders have since trimmed their bets on these.
As such, Deutsche Bank said it expected “big revisions” to the OBR’s economic forecasts.
A Financial Times survey of 96 leading economists also warned that tax rises could be on the horizon.
Reeves aimed to raise £40 billion in her October Budget, partly to fill what she claimed was a £22 billion black hole inherited from the previous Conservative Government.
The Consumer Prices Index measure of inflation jumped to 3.9% in January, while the Bank of England cut interest rates in February from 4.75% to 4.5%.
Previously, the rise in inflation in November to 2.6% helped trigger an increase in Government borrowing costs.
Remarkably, Sunaina Sinha Haldea, global head of private capital advisory at investment firm Raymond James, told the BBC the mood in financial markets was worse than after former PM Liz Truss’s mini-Budget in 2022
"The concern this time is more dire, the mood is darker," she said.
Households will feel the pain of any tax hikes
Regardless of what kind of tax increases or public spending cuts may be implemented by the Government, it’s unlikely the average household will escape the consequences – as we have seen with the Autumn Budget.
While the Labour Party promised in its election manifesto not to raise taxes for ‘working people’, the recent increase in National Insurance payments for employers has already led to price increases for customers and fewer or lower pay rises for staff.
Most businesses say they expect to hike prices in 2025, following the increase in National Insurance payments, according to Grant Thornton’s business outlook tracker.
According to the survey, 54% of respondents said they would need to pass increased employment costs onto consumers through higher prices.
Meanwhile, 52% of the 800 UK firms surveyed said they planned to reduce hiring, offer smaller pay packages or cut roles altogether to save money.
Schellion Horn, who led the research at Grant Thornton, said this would "put pressure on inflation" and mean interest rates remain higher for a more sustained period.
"Just when there is light at the end of the tunnel, the market is now faced with further cost increases," she said.