Rachel Reeves is set to implement tax increases that could elevate taxation to unprecedented levels in recent history, despite concerns about potential negative impacts on economic growth and the risk of a financial crisis.
As the Budget announcement approaches on Wednesday, the leader of the UK’s largest business association is expected to caution the Chancellor against the move. The message will be clear: “You cannot achieve economic growth through taxation alone.”
Rain Newton-Smith, the CEO of the Confederation of British Industry (CBI), plans to encourage the Chancellor to make difficult decisions aimed at stimulating the economy, rather than imposing additional tax burdens on the country.
Andy Haldane, the former chief economist of the Bank of England, expressed concerns yesterday about the Labour party’s strategy to increase taxes instead of reigning in unprecedented public expenditure. He warned that such a plan might provoke a negative reaction from financial markets.
“Financial markets require reassurance that this Government can effectively manage public spending,” Haldane noted.
Drawing a comparison to the notoriously unlucky cartoon character Wile E. Coyote, he cautioned, “We are in a precarious position. There is a possibility of encountering a ‘Wile E. Coyote moment,’ where the ground suddenly disappears beneath us in the financial markets. Avoiding such a scenario is crucial.”
Former Tory chancellor Kenneth Clarke said of the Budget: ‘We run the risk if we get it wrong, and continue to get it wrong, of a serious financial crisis.
‘It’s all very well saying we’re not going to be in hock to the bond markets. We’ve piled up such a mountain of debt over the last decade or so that we are in hock to the bond markets.’
The Chancellor Rachel Reeves (pictured) is poised to raise taxes to the highest level in modern history this week, despite pushback from experts who say it will damage growth and risk a financial crisis
The two men also warned that the litany of leaks about the contents of the Budget had caused the economy to stall, with business investment drying up and the housing market grinding to a halt.
Mr Haldane told the BBC the ‘fiscal fandango’ of the past months had caused ‘paralysis’ among businesses and consumers, adding: ‘We need a decisive action that puts to bed and beyond reproach any notion of further tax rises.’
Lord Clarke told Times Radio that leaking the contents of the Budget was a ‘hanging offence’, adding: ‘If you started leaking bits of the Budget… people started betting from the markets as to what you might do.
‘The debate this year has been worse than that because by chopping and changing, giving the impression that they’ve no idea quite what they’re going to do, they have spread an atmosphere of gloom and dismay and uncertainty.’ Former pensions minister Sir Steve Webb said the Treasury’s slowness to stamp out speculation that Ms Reeves could limit tax-free pension withdrawals had led to thousands of people ‘cashing out their pensions’ in a way that is ‘probably not in their financial interests’.
Ms Reeves is expected to defend any tax rises by arguing they protect public services such as the NHS. She will warn that cutting public spending would hit infrastructure investment and damage future growth. But a poll by the More In Common think-tank yesterday found that 67 per cent of the public want her to fill the fiscal black hole by cutting spending rather than raising taxes.
Ms Reeves had floated the idea of a manifesto-busting increase in income tax, but dropped it after being warned the backlash could hasten her exit from the Treasury.
Instead, she is expected to extend the six-year freeze on tax thresholds and bring in a pick and mix of smaller taxes covering everything from mansions to milkshakes as she tries to plug a £25billion hole in public finances.
The Taxpayers’ Alliance said the freeze in tax thresholds, which is set to be extended for a further two years, would cost the average earner £2,310 per year by 2030.
In a last-ditch plea ahead of Wednesday’s Budget, Rain Newton-Smith (pictured), the chief executive of the Confederation of British Industry (CBI), will warn the Chancellor: ‘You will never be able to tax your way to growth’
Transport Secretary Heidi Alexander defended the so-called ‘hokey-cokey Budget’ yesterday, saying: ‘The review that the Office for Budget Responsibility have done about the productivity forecasts has meant that this whole process has really taken place on shifting sands to start off with, and we’ve got a very challenging global economic environment.’
Writing in The Sunday Times, Ms Reeves said she was as ‘frustrated’ as the public at the slow pace of change. She vowed to ‘grip inflation’ with targeted measures expected to include freezing rail fares and cutting energy bills.
In a speech to the CBI’s annual conference in London today, Ms Newton-Smith will caution Ms Reeves against opting for ‘death by a thousand taxes’.
Many firms are still reeling from the last Budget when the Chancellor announced a £25billion raid on employer National Insurance – which has since been widely blamed for pushing up inflation as well as unemployment – and say they cannot take any more.
Ms Newton-Smith will say: ‘This Budget is about credibility. About trust. You will never be able to tax your way to growth. Tax rises alone are bound to fail. Growth… is the only way out of decline.’
She will also urge ministers to ‘change course’ on Labour’s Employment Rights Bill. The warning comes as figures from the job-search firm Adzuna reveal businesses are putting hiring on hold as they await the Budget, with vacancies falling to the lowest level since the pandemic.
