Will Rachel Reeves have to raise taxes again?

The City is “gloomy about the outlook”, and thinks Reeves will have to “tax, spend and borrow more”, said John Rentoul in The Independent.

James Carville, political strategist and former adviser to Bill Clinton, famously said he would want to be reincarnated not as the US president but as the bond market. Then “you can intimidate everybody,” he said.

Rachel Reeves is very likely be intimidated by the latest movement in the gilt markets (the markets for UK government bonds). Yesterday, the yield (or interest rates) on 30-year gilts increased to 5.25%, higher than their 4.5% spike after Liz Truss’s disastrous mini-Budget in 2022.

This would probably put her “on a collision course” with ministers at the Home Office, and the justice, housing, transport and environment departments. Meeting the fiscal rules is ultimately “non-negotiable”, a Treasury spokesperson told The Telegraph, but any further spending cuts are “likely to be greeted with horror by some cabinet teams”, said Sky News.

The UK’s interest rates on long-term borrowing are now at their highest level since 1998. Experts warn that this puts the government on track to miss the main fiscal rule Rachel Reeves set in her maiden Autumn Budget: the borrowing targets. And if the Office for Budget Responsibility (OBR) judges that to be the case, the chancellor will have to make some adjustments.

Big “revisions” to the OBR’s growth forecast are likely, said the investment bank. “As a result, more borrowing and tax rises, we think, will be likely this year,” wrote Sanjay Raja, its chief UK economist, in a note to investors. Reeves will “likely need to lift taxes at least one more time”.

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The Treasury has stated that there will be no tax changes in the spring statement. But it is “braced for the possibility” that the OBR will judge Reeves to be in breach of her own fiscal rule, according to Sky News. In this event, Reeves would “be left with no choice other than to shrink public-spending budgets further, as well as look for additional, potentially politically unpopular, cuts to the welfare budget”.

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What did the commentators say?

After a record-breaking £40 billion tax hike in the Autumn Budget, Reeves “downplayed the prospect of further tax rises”, said The Telegraph’s economics reporter Melissa Lawford.

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