UK Chancellor of the Exchequer Rachel Reeves delivers a speech at the Treasury on July 8, 2024 in London, UK.
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LONDON – Doubts are growing about the Labor government’s flagship growth and investment agenda, with one analyst warning that further tax hikes could come as soon as next year.
Finance minister Rachel Reeves last week announced a raft of reforms including measures to loosen financial services regulations and boost pension investments – among a raft of changes aimed at getting the UK economy growing again latest measures.
In theory, higher rates of economic growth could increase government tax revenue without requiring further tax increases because overall revenue would be higher. However, Labor has a fine balance between keeping taxes high enough to fund the country’s depleting public services while leaving businesses with enough cash to invest and grow.
“The chancellor is really walking a tightrope on this,” ING economist James Smith told CNBC’s “Squawk Box Europe” on Friday.
“If these regulatory changes – not just in finance but in planning and other areas – if they don’t move the economy forward, I think we’ll look again at more tax increases,” he said.
John Grieve, the former deputy governor of the Bank of England, last week expressed doubts about the ability of these measures to stimulate economic growth, saying that neither financial services deregulation nor pension reform would be “game-changing”.
“I think she (Reeves) is going to have to do something bigger to stimulate private investment,” Gieff told CNBC on Friday, noting that planning and infrastructure projects were more likely to boost the economy.
Just over two weeks ago, Reeves proposed a bumper tax and spending budget that included 40 billion pounds ($51.8 billion) in tax increases and changes to national debt rules – measures that Reeves said would be crucial to Rebalancing the UK’s growing deficit is vital.
The independent Office for Budget Responsibility said at the time that the measures should boost the economy in the short term and raised its growth forecast by a few percentage points for the next two years while lowering its long-term forecast. The OBR currently expects UK real GDP to grow by 1.1% in 2024, followed by 2% in 2025 before falling to 1.5%.
However, businesses hit particularly hard by an across-the-board increase in National Insurance payroll tax say Labour’s plans could stifle hiring and dampen investment.
“The real risk for the chancellor, but also for business, is that if we don’t see a growth response, we’ll see more of the same in the next budget next year,” ING’s Smith said.
The Labor government did not immediately respond to CNBC’s request for comment on further possible tax reform.
“Despair” growth rate
The British economy barely grew in the third quarter and barely managed to stay below expectations Data from the National Bureau of Statistics on Friday showed the economy grew by 0.1%. Gross domestic product (GDP) fell 0.1% in September, also lower than expected, after growing 0.2% the previous month.
“This is desperate growth. We’ve had 1% growth since the financial crisis, or about 1% now. That’s been 15 years. So this is an established trend and we need to Do something dramatic,” commented Giff. As far as GDP data is concerned.
The third quarter is a time of significant uncertainty for the UK, with the government accused of belittling the economy and scaring investors ahead of the October 30 budget.
As a result, some analysts believe the government’s fiscal plans, as well as its broader growth agenda, should be given more time to implement.
“Measuring success in the short term can lead to the entire effort failing before it even emerges,” Sarah Coles, head of personal finance at Hargreaves Lansdown, told CNBC via email on Monday.
Paul Dales, chief UK economist at Capital Economics, said the plans are likely to be measured over the coming months and years on whether economic growth succeeds in delivering on the OBR’s forecasts – any Tax changes will come with it.
“If economic growth weakens, and is expected to continue, that may mean that tax revenues will need to rise further to reach expected tax collection levels,” Dales said in an email. He noted that Capital Economics forecast growth would be There is a rebound. He added that tax revenues would be expected to rise if there was pressure to further increase government spending, all else being equal.
Markets will now focus on whether the government’s reforms can inject growth into the sluggish British economy.
Still, Coles said tax increases were “extremely unlikely” until at least its next financial statement in March.
“There’s always the possibility that we’ll be hit by unexpected events that upend expectations, but at the moment Labor has committed to a major budget every year, so any earlier major budget would be a real surprise – especially at a time of such magnitude. events in October following the Budget,” Coles said.
“The coming months will give us a clearer picture of whether the government has struck the right balance.”
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