Leading economists have issued a stark warning that the UK economy has already suffered significant damage due to the prolonged and chaotic preparations for Labour's upcoming Budget. They argue that months of speculation, fuelled by Treasury leaks and comments from Chancellor Rachel Reeves herself, have effectively stalled economic growth.
The Cost of Speculation
Experts state that the uncertainty has caused investors, consumers, and homebuyers to delay crucial financial decisions. This hesitation has resulted in a tangible economic slowdown. Helen Miller, director of the Institute for Fiscal Studies (IFS), described the Budget build-up as 'chaotic'. She expressed concern that the Chancellor now risks introducing a series of 'badly designed' smaller tax rises that could be detrimental to long-term growth.
Renowned economist Mohamed El-Erian, former head of investment giant Pimco, echoed this sentiment. He pointed to specific data, including a decline in retail sales and falling business confidence, as evidence that the 'prolonged speculation has flatlined growth'. El-Erian emphasised that a chaotic journey to a Budget makes the final destination harder to reach, complicating already difficult choices.
Expected Tax Rises and Their Impact
After reportedly backing away from a major income tax hike, Chancellor Reeves is now expected to unveil a package of smaller tax increases to balance the books. Key measures anticipated in the Budget include:
- A two-year freeze on tax thresholds, a move previously ruled out, expected to raise £9 billion through fiscal drag.
- A pensions raid worth up to £4 billion by clamping down on popular salary-sacrifice schemes.
- A string of smaller levies on items ranging from gambling and taxis to so-called 'mansions and milkshakes'.
However, these smaller taxes are not forecast to generate the £25 billion to £30 billion the Treasury is seeking. The much-discussed mansion tax, for instance, may raise as little as £400 million. There is also growing speculation that the 'temporary' 5p cut in fuel duty, introduced during the Ukraine war, will be ended.
Warnings of 'Real-World Damage'
The warnings extend across the economic spectrum. Andy Haldane, former Bank of England chief economist, said the 'fiscal fandango' of recent months has caused 'paralysis' among businesses and consumers. He called for decisive action that rules out further tax rises.
Paul Johnson, former director at the IFS, provided concrete examples of the fallout. He revealed that 'thousands of people have taken money out of their pensions because they were worried about potential changes'. Johnson also confirmed there has been a noticeable effect on the housing market and business investment, concluding that 'this is real-world damage'.
A Whitehall source added to the concerns, suggesting the Chancellor might be forced to dip into a long list of potential tax rises previously rejected by successive chancellors because they were considered 'bad ideas', risking a repeat of poorly received policies like the infamous 'pasty tax'.
