IFS Chief Warns Economic Stagnation Could Force Additional Tax Measures
The head of the Institute for Fiscal Studies (IFS) has cautioned that Rachel Reeves may be compelled to implement further tax increases next year to bolster Britain’s struggling economy, following disappointing growth figures.
Paul Johnson expressed grave concerns after official estimates revealed the economy had completely stagnated in the third quarter of 2024, with growth figures revised downward to zero, pushing the nation precariously close to a recession. This revelation has cast a shadow over Labour’s economic strategy and raised questions about the sustainability of their current fiscal approach.
The warning comes in the wake of the Chancellor’s inaugural Budget, which already introduced a substantial £40 billion tax increase—a measure Labour had initially characterised as a singular emergency intervention. However, the mounting economic pressures may force their hand towards additional revenue-raising measures.
In a particularly forthright interview with Times Radio, Mr Johnson outlined a rather bleak economic forecast. “Whilst I’m not anticipating an immediate recession, the Government faces an extraordinarily challenging set of decisions,” he explained. “The upcoming spending review this summer will present them with perhaps their most difficult choices yet, and I suspect we’ll see numerous disgruntled Cabinet ministers when they discover the severe limitations on departmental funding.”
He added, “Should economic growth fail to materialise as hoped, there’s a distinct possibility that the Chancellor might need to seek additional funding sources come autumn. This creates an impossible dilemma—either raise taxes further to adequately fund public services, or accept that without economic growth, public services will face disappointing shortfalls in resources.”
The business community has already expressed mounting concern regarding Labour’s recent policy decisions. Their anxiety centres particularly on the increased employer National Insurance contributions, comprehensive reforms to workers’ rights, and the elevation of the minimum wage. These measures have created a perfect storm of challenges for British businesses already grappling with economic uncertainty.
Recent findings from the Confederation of British Industry paint a troubling picture, with employers anticipating both price increases and workforce reductions in the approaching quarter. This gloomy outlook was further reinforced by an Institute of Directors survey, which revealed business leader confidence had plummeted to its lowest point since the initial COVID-19 lockdown.
The Bank of England’s Governor, Andrew Bailey, recently highlighted how post-Budget uncertainty was actively hampering economic recovery and complicating decisions around interest rate reductions. This observation gained additional weight following Monday’s unexpected data revision from the Office for National Statistics (ONS).
The revised figures showed that GDP had remained completely flat during the July-to-September period, contrary to the previously reported modest growth of 0.1 percent. With the economy subsequently contracting by 0.1 percent in October, Britain now teeters on the edge of a technical recession, traditionally defined as two consecutive quarters of negative growth.
Perhaps most concerning for Labour’s economic credentials is the decline in living standards. GDP per capita—a crucial measure of economic wellbeing—fell by 0.2 percent year-on-year in the third quarter, contradicting earlier estimates of stability. This development poses particular challenges for Labour, who entered government with ambitious promises about delivering the G7’s highest per capita growth—a pledge that has since been notably softened.
Mr Johnson offered a measured defence of the new government’s position, suggesting it would be “somewhat unfair” to hold them entirely responsible for the current economic situation. “They inherited an extremely challenging set of circumstances from the Conservative administration,” he noted. “While some of their remedial measures might not have been optimal, they faced genuine constraints in addressing these substantial problems.”
He particularly highlighted the recent National Insurance modifications: “The previous government’s reduction in employee National Insurance rates, followed by this government’s compensatory increase in employer contributions, has produced a net negative effect on the economy, at least in the immediate term, by raising the cost of employment.”
However, Johnson didn’t shy away from criticising Labour’s approach, pointing out that their spending commitments outstrip even their substantial tax increases. “We’re witnessing significant spending increases across various sectors—the NHS, the justice system, and beyond. What’s particularly noteworthy is that while there’s considerable discussion about the scale of tax increases, the spending increases are even more substantial.”
The situation could become even more precarious if economic growth falls short of the Office for Budget Responsibility’s projected 7 percent over the next four years. Lower growth would inevitably result in reduced tax revenues, potentially forcing the Chancellor to implement additional tax measures to meet fiscal rules and maintain balanced books. This pressure could intensify if Cabinet colleagues push for increased departmental budgets during next year’s spending review.
Any further substantial tax increases would present an enormous political challenge for the Chancellor, who recently assured business leaders there would be no additional tax rises during this parliament, stating emphatically that she was “not coming back with more borrowing or more taxes.”
However, this position appears to have softened somewhat. While other Cabinet members, including the Prime Minister, notably refused to echo this commitment, Ms Reeves herself seemed to qualify her statement just two weeks later, acknowledging that she “couldn’t write five years’ worth of Budgets in just the first five months of government.”
Nevertheless, she continues to downplay the likelihood of comparable tax increases, maintaining that “This was a once-in-a-parliament Budget that I delivered in October to wipe the slate clean after the mismanagement of the previous government.” Whether this position proves sustainable in the face of continuing economic challenges remains to be seen, as the government grapples with the complex task of balancing fiscal responsibility with economic growth and public service funding.
Key Economic Implications and Outlook
The current economic situation presents several critical challenges for the Labour government and UK businesses. Here are the essential points to consider:
* The British economy has reached a concerning inflection point, with revised figures showing zero growth in Q3 2024 and a subsequent 0.1% contraction in October, bringing the nation perilously close to a technical recession. This stagnation could have profound implications for government fiscal policy and business confidence.
* Rachel Reeves’s position as Chancellor faces mounting pressure, as her initial £40 billion tax increase may prove insufficient given current economic trajectories. Despite her earlier assurances of no additional tax measures this parliament, the IFS suggests further revenue-raising initiatives might become necessary if growth continues to underperform.
* Business confidence has deteriorated significantly, reaching its lowest level since the first COVID-19 lockdown. This decline stems from a combination of factors, including increased employer National Insurance contributions, new workers’ rights regulations, and rising minimum wage requirements, all of which are impacting operational costs and hiring decisions.
* The Labour government’s ambitious promise to deliver the highest per capita growth in the G7 appears increasingly challenging, particularly given the recent 0.2% decline in GDP per capita. This development could force a substantial recalibration of economic policy and growth targets.
* The upcoming spending review in summer 2025 will likely present significant challenges, as the government attempts to balance increased public service funding demands against limited resources and potential inflationary pressures. This balancing act could lead to difficult decisions regarding departmental budgets and potential additional taxation measures.
The situation remains fluid, with the government’s response to these challenges likely to shape both economic policy and political discourse in the coming months.