Rachel Reeves is set to fight Labor at the next general election with a raft of tax rises and spending cuts that amount to a work of “fiscal fantasy”, an analysis by leading economists has warned.
In its judgment on the Chancellor’s Budget, the Institute for Fiscal Studies (IFS) said the Chancellor had chosen a high-risk strategy by backloading his plans to launch just before the voters go to the polls in 2029.
Helen Miller, director of the think tank, said the budget plans would involve “almost heroic restraint in an election year” and suggested that Labor might eventually be forced to abandon some of its tax-hike measures or planned spending cuts.
“[It’s]a backloaded set of tax increases that almost entirely delay pain. It’s reminiscent of the fiscal fantasies of recent years. I hope this government is able to deliver on its plans. But I doubt it,” she said.
With Labor trailing Nigel Farage’s Reform UK in opinion polls, the IFS said Reeves’ decision to freeze income tax and the national insurance border for an extra three years would hit Labour’s wallet.
By 2029, more than a quarter of all taxpayers are expected to be dragged into the highest income tax bracket. Basic rate taxpayers will be expected to pay £220 more in tax each year until 2029, while higher rate taxpayers will pay £600 more.
Reeves himself warned in last year’s budget that extending the freeze, first introduced by the Conservatives and now described by opposition parties as a war on the middle class, would hurt working people.
Separate analysis published on Thursday by the Resolution Foundation showed that almost three-quarters of the £77bn of extra tax over the next five years would come after April 2029 – with as much as £26bn in 2029-30 alone, when the next general election is expected to be held.
Other budget measures due at the end of Parliament include: a pay-per-mile charge on electric vehicles from April 2028, and a £2,000 annual limit on how much employers and employees can pay into salary-sacrifice pension schemes without making National Insurance contributions.
The government plans to limit the increase in daily departmental expenditure to around 0.5% per annum in real terms over the two financial years from April 2028, down from the previous assumption of around 1% per annum.
The Resolution Foundation said the savings campaign would amount to “pre-election austerity”, but the Treasury has argued that its savings will come from efficiencies rather than cuts to services.
However, the IFS noted that successive governments had generally increased spending plans. Miller said, “Maybe the government will actually be able to find new efficiency savings. Or, maybe, when the time comes and the election approaches it will find that the spending plans are unrealistically low.”
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