LONDON (Reuters) – British finance minister Rachel Reeves could have to choose between tax rises and a return to austerity when she delivers a budget update this month, a leading think tank said on Thursday.
Reeves has said she will take action if forecasts from the government’s fiscal watchdog on March 26 show she is off course to meet the fiscal goals she set in October.
The Institute for Fiscal Studies said in that scenario Reeves would face a stark choice between her promise not to come back with a further round of tax rises and another pledge of no return to austerity.
Reeves announced her first budget last October which raised taxes on employers and added to borrowing.
Since then a rise in global borrowing costs and a weak domestic growth outlook mean many economists think the narrow 9.9 billion pounds ($12.70 billion) of leeway Reeves had in October to meet these rules has now evaporated.
“The Spring Forecast could turn out to be far more consequential than the non-event it was first billed as,” IFS Research Economist Bee Boileau said.
The IFS said Reeves could extend a freeze on the thresholds at which people start to pay different income tax rates beyond its current expiry in 2028, raising an extra 10 billion pounds a year in the 2029/30 tax year as more people hit those income levels.
Reeves said in October she would end the freeze of the thresholds – introduced by the previous Conservative government – and raise them in line with inflation from 2028.
On spending, the IFS said Reeves could reduce planned increases in public spending by government departments or allow higher-than-expected inflation to erode them.
But that would add to the challenge of a two-year government spending review due in June and imply a return to cuts for some departments.
Welfare spending represented another possible source of savings, with the government working on reforms to curb a steep rise in health-related benefits which it hopes will be reflected in this month’s public finance forecasts, the IFS said.
The Resolution Foundation think tank said in a separate report on Thursday that Reeves may look to freeze some of these benefits rather than raise them in line with inflation.
($1 = 0.7798 pounds)
(Writing by William Schomberg; editing by David Milliken, Aidan Lewis)
