Economists have warned that tax hikes are “likely” later this year due to narrow headroom in the public finances in order to meet fiscal rules.
It came as the Government’s official forecaster cautioned that there was a “significant risk” around whether the Chancellor will achieve her predicted £9.9 billion buffer in the public finances by 2029-30.
The Office for Budget Responsibility (OBR) said there is only a 54% chance Rachel Reeves would meet her self-imposed rule.
Ms Reeves told Parliament on Wednesday that around £14 billion of policy measures, including a series of spending cuts, were needed to balance day-to-day spending against tax receipts.
It came after the headroom projected in forecasts linked to the autumn budget were wiped out by higher Government borrowing costs, after higher-than-expected yields on Government bonds.
Economists stressed that the current buffer remains historically low and could result in further policy action by the Treasury later this year unless the economic outlook outperforms current estimates.
Pantheon Macroeconomics chief UK economist Rob Wood said the forecasts show that the “fiscal outlook remains perilous”.
He said: “We think the OBR will almost certainly have to cut potential growth forecasts this autumn, and we expect the Government to have to boost planned defence spending by another 0.5% of GDP by 2027.
“So further tax hikes and borrowing are coming.”
ING developed markets economist James Smith said: “The UK’s public finances are operating on increasingly fine margins, and we don’t think that defence will be the only department requiring fresh cash injections over the coming years.
“At the autumn budget, that may leave the Treasury with little choice but to boost government spending plans even further.
“In the absence of further upgrades to GDP growth, or a fall in gilt yields (not our base case), we think this is likely to necessitate further tax hikes.”
It came as the fiscal watchdog slashed UK economic growth forecasts for the year, highlighted a sharper rise in inflation and warned hat interest rates are set to stay higher for longer.
The OBR said on Wednesday that it expects UK gross domestic product (GDP) to rise by 1% in 2025.
The Chancellor pledged to tear down red tape and increase investment more quickly after the forecast was reduced from a previous prediction of 2%.
But the OBR upgraded the growth forecasts it previously set in October last year for the four years from 2026.
It now expects the economy to grow by 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029.
