Rachel Reeves will need to raise taxes by another £9bn after underestimating the true cost of her spending plans, a leading think tank has warned.
A lack of economic growth and headroom in current budgets means the Chancellor will have to raise taxes even higher to avoid cutting spending on unprotected departments such as transport and the environment, according to the Institute for Fiscal Studies (IFS).
The warning comes despite Ms Reeves’ announcement of a record £41.5bn in tax rises on Wednesday, which she said would “fix the foundations” and “restore stability to our economy”.
IFS director Paul Johnson accused the Government of playing “silly games” with the finances, under which officials “pencil in implausibly low spending increases for the future in order to make the fiscal arithmetic balance”.
He warned: “I am willing to bet a substantial sum that day-to-day public service spending will in fact increase more quickly than supposedly planned after next year.”
Ms Reeves on Wednesday announced a spending binge on public services. However, because many departments such as health have spending protections in place, this rise will not be spread evenly.
The Chancellor has vowed to avoid a return to austerity, promising to protect public services.
However, Mr Johnson said the cash allocation in the Budget would “almost certainly” mean a real-terms spending cut for departments that do not have spending protections.
“It would take in the order of £9bn – and these are rough estimates – of additional spending just to avoid real-terms cuts for some departments.
“My guess is that, given the ambitions of the Government and the situation of public services, the number we will end up with will be more than £9bn.”
The public finance figures “still look shaky” despite Labour’s spending and tax raising plans, he added.
The Chancellor will struggle to comply with her new rule to balance the current budget by a margin of £10bn because of her failure to increase fuel duties and changes to interest rate expectations, Mr Johnson said.
The IFS estimated that this will cost £5bn a year by the end of Parliament, wiping out much of Ms Reeves’ “razor thin” headroom against her fiscal rule.
Mr Johnson also said that Ms Reeves’ flagship increase in employer National Insurance contributions (NICs) will not raise “anything like” the £25bn she has claimed it will.
This is because the jobs tax raid will result in lower wages, reducing the amount of revenue raised from both employer National Insurance contributions and income tax.
The Government will raise only £10bn after accounting for lower pay awards and its decision to shield public sector workers, he predicted.
Mr Johnson said: “This increase will not actually get the Treasury anything like the £25bn stated on the scorecard. So not quite the big revenue raiser as it looks at first glance.”
His comments echo warnings from the Office for Budget Responsibility (OBR), Britain’s tax and spending watchdog, which said on Wednesday that Labour’s increase in employer National Insurance would only raise an additional £10bn.
