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

LONDON — Doubts are growing about the Labor government’s plan for growth and investment, with one analyst warning that a tax hike could come as soon as next year.

The UK Chancellor of the Exchequer, Rachel Reeves, last week announced a series of reforms, including the withdrawal of financial services and measures to improve investment in pensions – the latest in a series of reforms aimed at growing the country’s economy again.

A high rate of economic growth may increase the amount of government taxes on its own without the need to raise taxes further, because total revenue would be higher. Workers have a fine balance to strike, however, in keeping taxes high enough to fund the country’s depleted public services, while leaving businesses with enough capital to invest and grow.

“The Chancellor is walking a real tightrope with this one,” James Smith, an economist at ING, told CNBC’s “Squawk Box Europe” on Friday.

“These regulatory changes – not just in finance but in programs and other areas – if they don’t move the economy, I think we’re looking at tax increases again,” he said.

The former deputy governor of the Bank of England, John Grieve, expressed doubts last week that the measures will boost growth, saying that neither the withdrawal of financial services nor the reform of pensions is “a game changer.”

“I think of him [Reeves] I’m going to have to do big things to try to increase private investment,” Gieve told CNBC on Friday, citing planning and infrastructure projects that could boost the economy.

The changes came just two weeks after Reeves’ biggest tax and spending budget, which included £40 billion ($51.8 billion) in tax increases and changes to the country’s debt rules – measures Reeves said were essential to rebalancing the UK’s deficit.

The independent Office for Budget Responsibility said at the time that the measures should propel the economy in the near term, and raised its forecast for economic growth by a few percentage points over the next two years, while lowering it longer term. The OBR now expects UK real GDP growth of 1.1% in 2024, followed by a 2% expansion in 2025, before slowing to 1.5%.

Businesses, however – hit hard by huge increases in National Insurance tax – say Labour’s plans are likely to reduce employment and discourage investment.

“The real danger for the chancellor – and for businesses as well – is that we get the same next year in the next budget if we don’t see that as a response to future growth,” 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, expanding less than expected by 0.1 percent, data from the Office for National Statistics showed on Friday. Gross domestic product (GDP) fell 0.1% in September, also below expectations and following growth of 0.2% last month.

“This is phenomenal growth. We’ve grown 1%, or 1% growth now since the Financial Crisis. That’s 15 years. So this is a steady trend and we need to do something dramatic,” Gieve said, commenting. in GDP data.

The third quarter was a time of significant uncertainty in the UK, with the government accused of understating the economy and bullying investors ahead of the October 30 budget.

Therefore, some analysts argue that the government’s financial plans, and the growth agenda in general, should be given more time to sleep.

“Measuring success on short-term risks means that the entire effort has failed before the shoots have had a chance to reach the top,” Sarah Coles, head of finance at Hargreaves Lansdown, told CNBC in an 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 held up against the OBR’s forecasts – and any tax changes that would follow suit.

“If so [growth] is weak and that weakness is expected to continue, that may mean that taxes need to rise to meet the projected levels of tax revenues,” Dales said by email, noting that Capital Economics predicts significant growth. If there was more pressure. to increase government spending, while everything else unchanged, higher taxes can be expected, he added.

Markets will now look to see if the government’s reforms can spark growth in Britain’s flagging economy.

However, Coles suggested that a tax increase – at least in the next financial statement in March – is “highly unlikely.”

“There’s always the chance that we could be hit by something mysterious, which raises expectations, but at the moment Labor is committed to one big Budget a year, so anything big will be a surprise soon – especially after such a big budget. in October,” said Coles.

“The coming months will give us a clear picture of whether the government still has the right amount of money.”