UK taxes could rise further if Labour’s growth agenda fails: analysts

LONDON — Doubts are mounting over the banner of the Labor government growth and investment agenda, one analyst warned that more tax increases could be coming as soon as next year.

UK Finance Minister Rachel Reeves announced last week that a series of reformsincluding deregulation of financial services and measures to boost pension investment – to achieve a host of recent changes. the country’s economy is growing again.

A higher rate of economic growth could, in theory, increase the government’s tax take without having to raise taxes further because overall revenue would be higher. Labor has a fine balance to strike, however, keeping taxes high enough to fund the country’s depleted public services while leaving enough money for businesses to invest and grow.

“The chancellor is walking a real tightrope with this,” ING economist James Smith said on CNBC’s “Squawk Box Europe” Friday.

“If these regulatory changes, not only in finance, but also in planning and other areas, don’t move the economy, I think we’re going to see more tax increases,” he said.

The former deputy governor of the Bank of England, John Grieve, expressed doubt last week that the measures would boost growth, saying neither financial services deregulation nor pension reforms were “game changers”.

“I think he (Reeves) is going to have to do bigger things to try to encourage private investment,” Gieve told CNBC on Friday, noting that planning and infrastructure projects are much more likely to boost the economy.

The reforms came just over two weeks after Reeves’ coup tax and expenditure budgetIncluding 40 billion pounds ($51.8 billion) in tax increases and changes to the country’s debt rules – measures Reeves said were essential to rebalancing the UK. insignificant deficit.

The independent Office for Budget Responsibility said at that time that the measures should stimulate the economy in the short term, and raised the economic growth forecast by several percentage points in the next two years, lowering it in the longer term. The OBR now expects UK real GDP to grow by 1.1% in 2024, followed by an expansion of 2% in 2025, before falling to 1.5%.

Businesses, however – which were hit particularly hard by increases in National Insurance payroll tax – said Labour’s plans were unlikely. limit hiring and cut investment. On Monday, a consortium of UK retailers wrote to Reeves warning that consumers would face higher costs as a result of the budget.

“The real risk for the chancellor – and for businesses too – is that we will get more of the same next year if we don’t see that response in growth in the next budget,” said ING’s Smith.

The Labor government did not immediately respond to CNBC’s request for comment on the potential tax changes.

The UK economy barely grew in the third quarter, coming in less than expected Expansion of 0.1%Figures from the Office for National Statistics showed on Friday. Gross domestic product (GDP) fell 0.1% in September, also below expectations and after 0.2% growth in the previous month.

“It’s disappointing growth. We’ve had 1% growth, or about 1% growth now since the Financial Crisis. That’s 15 years. So it’s a well-established trend and we need to do something drastic,” Giev said in comments. in GDP data.

The third quarter was a time of great uncertainty in the UK, with talk of the economy ahead of the budget on 30 October and investors being blamed for panicking.

Therefore, some analysts believe that the government’s fiscal plans and the growth agenda in general should be given more time to bed.

“Measuring success in the very short term risks declaring the entire effort a failure before the green shoots have a chance to reach the surface,” Sarah Coles, head of personal finance at Hargreaves Lansdown, told CNBC by email on Monday.

Paul Dales, chief UK economist at Capital Economics, said the plans would likely be measured in the coming months and years by how well economic growth compares to the OBR’s forecasts, after which tax changes should follow.

“If (growth) is weaker and this weakness is expected to persist, taxes may need to rise further to achieve the projected level of tax collection,” Dales said by email, noting that Capital Economics expects an impressive increase in growth. . He added that if there was more pressure to increase government spending, all else being equal, higher taxes could be expected.

Markets will now look to Britain’s economy where government reforms could boost growth.

However, Coles suggested tax increases – at least in the next fiscal year in March – were “highly unlikely”.

“There’s always the possibility that something could hit us in the middle of nowhere, which throws expectations off course, but at the moment Labor has committed to a big Budget for the year, so anything major earlier would be a real surprise, especially after such a big fiscal year in October.” , said Coles.

“The coming months will give us a clearer picture of whether the government has got the balance right.”