The Treasury's independent forecaster has warned that Rachel Reeves's tax-raising budget will still leave the public finances in a 'vulnerable' position despite her more than doubling the UK's financial buffer. The Office for Budget Responsibility (OBR) said the potential for damaging events – such as a global stock market crash or future pandemic – to knock the government's finances off course remained high, even while the chancellor increased her headroom from £9.9bn to £22bn.
After a wide-ranging review of the UK's economic health stretching back to the 2008 financial crash, the OBR also said the economy would grow at a slower rate over the next five years than previously estimated. The OBR said the economy would grow by 1.5% this year, an increase from its earlier 1% forecast, and by 1.4% next year, much lower than a forecast in March of 1.9%. Growth would also be lower than expected in the following three years, undermining the chancellor's drive.
Richard Hughes, the chair of the OBR, emphasised the increasing vulnerability of the UK from a predicted sharp rise in borrowing over the next two years. He said the £22bn buffer remained slim, and could be overwhelmed by '£60bn more debt by the end of the decade than we forecast in March, an overall debt burden which is twice the advanced-economy average, and the country continuing to pay more to service that debt than at almost any other time in its postwar history'.
Government spending would increase in each of the next five years, adding £11bn in 2029-30, Hughes said. Ruth Curtice, the chief executive of the Resolution Foundation thinktank, described the budget as a 'repair job' that left much of the pain from higher tax rises to 2028 and beyond. Helen Miller, the director of the Institute for Fiscal Studies, called it a 'spend now, pay later' budget that backdated most of the tax rises to the end of the parliament.
Reeves has relied on a three-year extension to a longstanding freeze on income tax thresholds to close much of the spending gap that arose from higher spending and the downgrade in growth. Often dubbed a stealth tax, the freeze pushes more people on low incomes into the standard rate tax band and existing taxpayers into the higher rate bands. The OBR said the move would raise an extra £8.3bn in 2029-30.
