Starmer Hints at Possible Tax Increases or Spending Cuts
Sir Keir Starmer has suggested that Rachel Reeves, the Chancellor, might need to consider raising taxes or cutting public spending to adhere to her strict borrowing rules. During a recent visit to Washington, the Prime Minister refrained from completely ruling out potential government interventions aimed at reducing borrowing in the upcoming spring statement, scheduled for March 26. However, he emphasized that major tax increases similar to those seen in the last Budget are unlikely.
On the same day, the Office for Budget Responsibility (OBR), the official fiscal watchdog, will release an update on the public finances. Reeves has publicly assured that her spring statement will not constitute a full-scale “fiscal event” that would involve sweeping changes to existing tax regulations or public spending policies. Nevertheless, due to the “ironclad” nature of her borrowing rules, if the OBR indicates a risk of those rules being violated, Reeves may be compelled to implement tax adjustments or spending cuts.
When asked whether he could dismiss the possibility of tax hikes or spending reductions, Starmer responded cautiously, saying, “We are still in the early stages, and I won’t jump ahead of our decision-making process. The major tax decisions were made during last year’s Budget, and as we approach this spring statement, I won’t pre-empt the specifics of what we may or may not do. However, I want to clarify that the significant decisions were addressed in the last Budget, which will guide our approach this time.”
In the previous Budget held in October, Reeves drew criticism for announcing a considerable increase in the national insurance rate paid by employers and for imposing inheritance tax on previously exempt farmland. At that time, she defended these measures as essential for rectifying public finances damaged by the Conservative government and promised not to introduce similar tax hikes in the future. However, economic growth has been weaker than anticipated, accompanied by rising inflation, which indicates that borrowing may be increasing.
As it stands, the Chancellor’s fiscal “headroom”—the gap between Treasury borrowing and the maximum allowed under the fiscal rules—was reported at £9.9 billion. Preliminary drafts from the OBR suggest that this headroom may have been entirely depleted, necessitating either tax increases or spending cuts to balance the budget. If the shortfall is only a few billion pounds, Reeves might be able to address it through minor technical adjustments to tax regulations. However, a more significant fiscal gap would pose a greater challenge.
Potential Changes Reeves Could Implement in Spring Statement
By Robert Salter, Director at Blick Rothenberg
- The freeze on income tax bands could be extended until April 2029 (currently frozen until April 2028). While this is not a direct tax increase, it generates significant additional revenue through fiscal drag, which could further impact thousands of pensioners who may be pulled into the income tax bracket for the first time.
- Reducing the ISA limits—especially for cash ISAs—down to £4,000 or £5,000 annually. This change could be marketed as not affecting the majority of taxpayers, as a smaller percentage typically invests more than these amounts. However, opposition from banks and building societies could arise, citing adverse effects on savings.
- Cancelling lifetime ISAs for new contributions, as current limits on property purchases have not kept pace with market realities, rendering them less practical for potential homeowners.
- Instead of lowering employee national insurance contribution (NIC) rates, she might consider expanding the scope of NICs to include benefits-in-kind, such as non-cash perks provided to employees, which currently only apply to cash earnings.
- Following the imposition of VAT on private school fees, she could explore extending VAT to private healthcare or broadening VAT on educational fees to include nurseries and universities, which often operate similarly to private schools.
- Introducing NIC on employer pension contributions, which are presently exempt from NIC.
- Tightening regulations on personal service companies, which allow owner-directors to choose how they receive income, potentially providing a tax advantage over self-employed individuals.
- Raising corporate tax rates, although the Treasury has previously indicated a resistance to such increases.
- Reducing the 25% tax-free allowance from pension funds at retirement, a move that could be contentious given its prominence in retirement planning.
