Leading economists have issued a stark warning that the UK remains in a precarious fiscal position, despite the Chancellor Rachel Reeves unveiling an historic fiscal consolidation in Wednesday's Budget. The measures, designed to shore up public finances and prevent further tax increases, have failed to convince analysts of a sustainable path forward.
A Record Tax Burden
In a bold move, Chancellor Rachel Reeves implemented a sweeping combination of tax rises totalling £26 billion. This was achieved through sector-specific levies, pension reforms, and a freeze on tax thresholds. The decision was a response to a fiscal position severely strained by previous spending pledges and a shifting global economic landscape.
The consequence of this strategy is profound. The UK's overall tax burden will now rise to the highest level as a percentage of Gross Domestic Product (GDP) in the nation's history, eclipsing the previous record set just after the Second World War.
A Fragile Buffer and Market Concerns
As a result of these tax increases, the Chancellor has created £22 billion of breathing space against her own self-imposed debt rules. This buffer is more than double the amount she targeted in last year's Budget and the Spring Statement in March. While investors had hoped a larger buffer would quell market speculation over tax rises, the method of its creation has drawn criticism.
Michael Saunders, a former Bank of England rate-setter and now senior economic adviser at Oxford Economics, highlighted the underlying weaknesses. "The Budget still leaves the UK with a relatively weak fiscal position," he stated, pointing to public debt being well above levels from two decades ago, coupled with low potential growth and an ageing population. He concluded that "The UK is still not securely on a sustainable fiscal path."
Kicking the Can Down the Road
A significant point of contention is the Chancellor's approach. By opting for a 'smorgasbord' of smaller, delayed tax rises instead of immediate, broader measures like an income tax hike, many revenue-raising policies will not take effect for years. For instance, a proposed mansion tax on properties valued over £2 million is not scheduled for introduction until 2028.
David Zahn, head of European fixed income at Franklin Templeton, criticised this tactic. "This approach effectively kicks the can down the road until the next parliamentary election," he said, casting doubt on whether these future tax changes would ever be implemented under a potentially different government.
Further concerns were raised about growth. The official Office for Budget Responsibility (OBR) scorecard indicated that none of the Budget measures had a sufficiently material impact on the UK's official growth projections. Arun Advani, a director at the Centre for the Analysis of Taxation, echoed this, noting that despite being a government "supposedly obsessed with growth," the Budget is unlikely to "move the needle on growth much one way or the other."
