Chancellor Rachel Reeves (Image: Getty)
Rachel Reeves is set to impose a tax on pension savings in a desperate bid to balance the books as government debt soars, experts warned.
Leading think tank the Institute for Fiscal Studies warned pensions were a “juicy target” while a stealth rise in income tax and hikes to council tax are also possible.
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It came as the Chancellor issued a plea to US President Donald Trump to spare the UK from a tariff on car imports, following warnings a tariff war with America could damage the UK economy and make further tax rises inevitable,
At the same time, Ms Reeves and Prime Minister Sir Keir Starmer face a growing rebellion from Labour MPs furious at cuts to benefits which the Government’s own predictions show will force 250,000 people into poverty.
The Institute of Fiscal Studies (IFS) warned tax rises were likely in a full budget to be delivered by Ms Reeves in the autumn, as it gave its verdict on the Chancellor’s spring statement this week.
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IFS Director Paul Johnson said: “There is a good chance that economic and fiscal forecasts will deteriorate significantly between now and an Autumn Budget.
“If so, she will need to come back for more, which will likely mean raising taxes even further.”
Mr Johnson said the Chancellor could tax pension contributions. “One of the reasons that I worry about pension taxation is it looks like a nice juicy place to go for quite a lot of money but not necessarily always a good way of raising money.”
Another option was that Ms Reeves would extend the freeze on income tax and National Insurance, a stealth tax which effectively increases taxes on wages.
But reforms to council tax could also be used as an opportunity to raise more money. He said there were “all sorts of reforms that need to be made to council tax that could get you some more money.”
At the same time, the IFS said the Treasury’s figures suggested huge cuts to some public services would also be needed. Because services such as the NHS are “protected”, the burden could fall on schools, courts and prisons.
Mr Johnson pointed out that the Government is now set to borrow ￡50 billion more than it was predicting in October last year, despite Ms Reeves’s goal of getting borrowing down, And he said the watchdog has found there was only a 54% chance she would meet her targets.
Tory shadow chancellor Mel Stride said: "Being forced into an emergency budget is one thing, but the Chancellor has set herself up for the same thing all over again.
"She dug a hole for herself by pushing borrowing to the limit and leaving only wafer thin margins for meeting her fiscal targets - and she has chosen to leave exactly the same amount of wiggle room this time, despite warnings from the official budget watchdog about the uncertainty we face.
"This is a recipe for instability. Speculation will inevitably turn to whether further tax rises or spending cuts will be necessary come the autumn.”
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It follows a series of dire financial predictions as the OBR slashed UK economic growth forecasts, saying it expected UK gross domestic product (GDP) to rise by just 1% in 2025, and warned inflation is now expected to average 3.2% this year, missing the target of 2%.
But global events could make the situation worse said the watchdog, as it warned a full-blown tariff war with the US could wipe 1% off gross domestic product next year and derail Ms Reeves’s hopes of balancing the books.
It comes after US President Donald Trump announced a 25% tariff on vehicles imported to the US, including those from the UK, will come into effect on April 2 - which Mr Trump is calling “liberation day”.
Responding to the White House announcement, OBR chairman Richard Hughes said: “This represents the crystallisation of one of the risks that we highlighted around our central forecast, which was one of escalating global trade tensions.”
Ms Reeves said the UK is in “extensive talks” with the US to try to protect British businesses from tariffs, and hopes for progress “in the next few days”.
The US is the UK’s largest export market for cars, and we sell vehicles worth ￡6.4 billion to the US each year. Top-of-the-range British-made cars such as Jaguars have enjoyed particular success in the US in recent years.
Business leaders warned that the Government’s employment rights bill, currently making its way through Parliament, could cause further harm to the economy.
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Jane Gratton, Deputy Director Public Policy at the British Chambers of Commerce said: “Some of the proposals are deeply worrying for employers. There’s a high risk of unintended consequences that could limit employment opportunities and economic growth.”
Meanwhile, Ms Reeves and Sir Keir attempted to see off a growing rebellion among Labour MPs over benefit cuts by insisting figures showing 250,000 will be forced into poverty were wrong - even though they were published by the government.
An impact assessment by the Department for Work and Pensions (DWP) revealed the impact of changes to the benefits system, including new rules making it harder to claim Personal Independence Payments (PIP) available to people with long-term illnesses or disabilities. But the Chancellor insisted the reforms would actually make people wealthier by getting them into work.
She said: “I am absolutely certain that our reforms, instead of pushing people into poverty, are going to get people into work.
“And we know that if you move from welfare into work, you are much less likely to be in poverty.”
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Nonetheless, furious Labour MPs are planning to fight the cuts with one predicting “the mother of all rebellions”.
Labour MP Richard Burgon said: “I would say, and it’s no exaggeration to say, that if the government doesn’t rethink this policy in relation to disability benefits, I think it would be the mother of all rebellions.”
Mr Burgon, a left-winger, insisted Labour MPs in every section of the party were ready to fight the Government. He said: “This isn’t an issue just for the left of the parliamentary Labour Party. It’s not a left-right issue in the Labour Party. It’s a right or wrong issue. Plenty of people right across the board are really concerned.”