Starmer hints Reeves could raise taxes again at Spring Statement next month

Sir Keir Starmer has hinted that Rachel Reeves may raise taxes or cut public spending if necessary to avoid breaking her borrowing rules.

The Prime Minister refused to rule out interventions to reduce government borrowing at the Spring Statement next month – but insisted that a repeat of the major tax increases seen at the Budget is off the cards.

On 26 March, the Office for Budget Responsibility (OBR), the official fiscal watchdog, will publish an update on the state of the public finances.

Reeves has promised that her Spring Statement, delivered on the same day, will not be a full-blown “fiscal event” with comprehensive changes to the existing tax rules and public spending regime.

But the Chancellor says her borrowing rules are “ironclad”, meaning that if the OBR decides they are at risk of being broken she will have to make some tax or spending tweaks.

Starmer made the comments during his trip to Washington for his first meeting with Donald Trump since the President was inaugurated. They are set to discuss Ukriane and security in Europe.

Asked whether he could rule out higher taxes or cuts to spending, Starmer said: “Well we are at the early stages of that, and obviously I am not going to get ahead of myself until we have made decisions.

“But as I have said before, in terms of the big decisions on tax obviously the Budget was the place that we took those decisions – but as ever, going into a statement I am not going to say in advance what we might do and what we might not do.

“But let me not set hares running, the big decisions were in the Budget of last year and that is the way we are approaching this Spring Statement.”

At the Budget in October, Reeves courted controversy by unveiling a significant increase to the rate of national insurance paid by employers, as well as imposing inheritance tax on some farmland that was previously exempt.

She insisted at the time that the measures were necessary to fix the public finances, which she claimed had been wrecked by the Conservatives, and she promised not to repeat the tax rises in future.

But economic growth has proved to be weaker than expected by the OBR, with inflation running higher – which tends to suggest that borrowing is likely to increase.

The Chancellor’s “headroom” at the Budget – the difference between how much the Treasury is borrowing and the maximum allowed under the fiscal rules – stood at £9.9bn.

A first draft of the OBR’s March verdict is reported to show that the headroom has been wiped out entirely, which would require higher taxes or lower spending to compensate.

If the shortfall proves to be only a few billion pounds, Reeves may be able to make up for it with relatively minor technical tweaks to the tax rules, but a larger black hole would prove more challenging.

Rob Wood, economist at Pantheon Macroeconomics, said: “Higher market interest rates have likely wiped out Chancellor Reeves’s headroom against her fiscal rules.

“She will likely plug that £10bn hole by reducing planned public spending growth over the rest of the Parliament a little and making welfare payments less generous.

“She will not have to raise taxes again next month. If she did need to raise more tax revenue, I suspect Reeves would free income tax thresholds for longer, out to 2030 rather than raise tax rates now.“Looking further ahead than the next fiscal event, this and future UK governments will inevitably have to raise taxes further over the next five to 10 years and beyond. The government debt trajectory already required 1 per cent of GDP tax hikes every 10 years until the middle of the century, or equivalently spending cuts or productivity gains.“Defence spending will have to rise above 2.5 per cent of GDP, putting further pressure on the rest of the Budget. I would be surprised if the Government were able to limit defence spending to 2.5 per cent of GDP this Parliament. But that issue is for a future Budget, not the March fiscal update, which will assume defence spending of 2.5 per cent GDP is funded by reduced overseas development aid.”

According to forecaster Capital Economics, the rises in rate expectations and gilt yields from last October’s Budget to 12 February suggest Reeves’s headroom of £9.9bn may have been reduced to just under £3bn. And this is before the OBR factors in the recent weakness in economic activity.