Tax rises will come if economy shrinks further, IFS warns Rachel Reeves after Spending Review

Chancellor Rachel Reeves will “almost certainly” have to introduce tax rises if the economy shrinks any further, the influential Institute for Fiscal Studies (IFS) has warned, as figures showed the economy shrank more than expected in April.

Just a day after the Chancellor unveiled her spending plans for the rest of the Parliament, the IFS claimed Ms Reeves had only met the fiscal rules by a “gnat’s whisker”.

Chancellor Rachel Reeves | Carl Court/Getty Images

It came as figures revealed the economy had shrunk by 0.3 per cent in April - the biggest monthly contraction since October 2023 and worse than the 0.1 per cent fall most economists had expected. The result will fuel fears of a potential recession.

Ms Reeves refused to rule out tax rises in the wake of delivering the Spending Review on Wednesday, which included £52 billion for Scotland, big increases for health and transport, but a series of cuts in many departments.

Elsewhere, the Fraser of Allander Institute warned Labour claiming it was a £9.1 billion increase for Scotland’s public finances was “neither transparent nor helpful”, instead forecasting that “funding will be £0.7bn lower than their central estimate published on 29 May”.

In recent days, both Ms Reeves and Number 10 have said the economy is beginning to turn a corner, allowing them to fund the U-turn on the winter fuel allowance.

Going through the fiscal update, the IFS questioned the UK government's claim to have identified billions of pounds in “efficiencies”, and pointed out most departments were facing the same level of cuts.

Paul Johnson, director of the IFS, said: “Despite some of the rather odd recent claims, neither the economic forecasts nor the public finances have improved relative to the genuinely difficult situation we knew about a year ago, rather the reverse.

Dave Doogan MP accused Labour of killing growth

“Ms Reeves is now going to have all her fingers and all her toes crossed, hoping that the OBR [Office for Budget Responsibility] will not be downgrading their forecasts in the autumn. With spending plans set, and ‘ironclad’ fiscal rules being met by gnat’s whisker, any move in the wrong direction will almost certainly spark more tax rises.”

Mr Johnson also suggested the Treasury was at times “making up the numbers” and described Ms Reeves’s speech to the Commons on Wednesday as “baffling”.

The Chancellor has repeatedly said the cost of Wednesday’s spending review is covered by the tax rises she brought in last year, saying departments must now “live within their means”.

But economists have warned a weakening economy and additional commitments such as reversing much of the cut to winter fuel payments mean taxes are likely to go up again in the autumn.

Asked on Thursday whether she could guarantee there would be no further tax rises, Ms Reeves told LBC: “I think it would be very risky for a Chancellor to try and write future budgets in a world as uncertain as ours.”

The Chancellor acknowledged the reduction in GDP was “disappointing”. She blamed “uncertainty” caused by Donald Trump’s announcement of sweeping tariffs at the start of April.

Dave Doogan, the SNP’s economy spokesperson, said "the Labour Party is destroying jobs and killing growth".

He said: “Just one day has passed since the Labour government’s spending review and Rachel Reeves’s budget has already gone bust - the economy has retracted and expert analysis has shown the big claims don't stand up to scrutiny.

"We already know the Labour government is destroying jobs with its National Insurance jobs tax hike, which has seen 55,000 people dropping off payroll between March and April and unemployment rising to a four-year high - worse than under [former prime ministers] Rishi Sunak and Liz Truss.”