Reeves on growth ‘hell slide’ after welfare U-turn as rebels call for wealth tax
Rachel Reeves faces a “hell slide” in her ambition to balance economic growth with her “iron clad” fiscal rules following Labour’s U-turn on welfare.
The Chancellor had hoped government plans for welfare reform would shed £5bn in spending as they targeted restrictions on personal independence payments (PIP) and limited the sickness-related element of universal credit.
The government’s retreat on reforms to welfare has spiked renewed fears of a tax raid with the Chancellor’s wafer-thin fiscal headroom set to be eroded.
But retreats across the board have left the government effectively saving no money from the bill, according to the Institute for Fiscal Studies, after it had initially banked on the funds to help balance the nation’s books.
Bond yields have remained relatively stable following the government’s latest climb down but Gordon Shannon, fund manager at Twentyfour Asset Management, warned it has led gilt investors to require tax rises to maintain fiscal stability.
“Rachel Reeves has left herself no room to manoeuvre by having such a skinny headroom,” Shannon told City PM, “and when you’ve got that little room to manoeuvre, there was going to be something.”
“But unlucky for them, that is quite clearly on their doorstep in their inability to produce the spending cuts that they definitely needed to vaguely keep within the fiscal rules.”
One of the leading Labour rebel MPs, Rachel Maskell told the Today programme that “we need to look at those with the broader shoulders’ to balance the books.”
She said: “that’s why I think we heard very much in the debate, including from myself, that we need to look at those with the broader shoulders, as the Prime Minister said, contributing more into our system, but never pushing down on the poorest.”
She added, “we do need to look at things like a wealth tax, £24 billion, or equalisation of capital gains tax.”
Minister refuses to rule out budget tax grab
Shannon said gilt investors would now be looking to tax rises in order for the government to maintain a budget in balance, or at least “looks like it might one day be in balance”.
Though he warned a fresh batch of taxes were set to have a negative impact on growth prospects.
“It’s not that gilt investors are keen for tax rises but that looks like the only possible way to stay within the fiscal rules… even though it’s got pretty negative implications for growth,” Shannon said.
He added the welfare U-turn had put Rachel Reeves in a precarious spot as she tries to maintain fiscal discipline.
“The market is requiring you to put up taxes, so you do that but then that pushes down growth more, which makes everyone a bit less happy to make investments in the UK. So more money leaves, so your borrowing requirements are higher because you’re trying to support an economy that’s now floundering.
“What do you do there? You’ve got to borrow more.”
“And that means that, you know, an awful lot of things just won’t happen, whether that’s building a new factory or employing new workers starting a business, a lot of these things won’t come through. And at the margin, that definitely means a lowering of the growth trajectory…which was already in a pretty lackluster state. So, yeah, you’re in a bit of a hell slide there.”
The Labour government’s climb down on welfare follows a retreat on the winter fuel payment last month, which marked a major headache for the Chancellor after it was hoped to save up to £1.5bn a year.
The rising costs of Labour retreats have spiked concerns for a repeat of the 2024 Autumn Budget where Rachel Reeves raised taxes by an eye-watering £40bn.
The UK economy shrank 0.3 per cent in April, official data revealed last month, after the Chancellor’s budget tax hikes came into effect.
Senior cabinet minister Pat McFadden warned the government’s welfare U-turn would ultimately mean there is less money to spend on other priorities.
“There is a cost to the decision taken yesterday, there’s no denying that,” McFadden told the BBC on Wednesday morning.
The minister also refused to explicitly rule out tax rises, saying he was “not going to speculate on the budget”.