Chancellor Rachel Reeves delivers a speech at the Treasury on July 8, 2024 in London, England.
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LONDON – Doubts are growing over the Labor government's flagship growth and investment agenda, with an analyst warning there could be further tax rises as early as next year.
British Finance Minister Rachel Reeves last week announced a series of reforms including deregulation of financial services and measures to encourage pension investment – the latest in a series of changes aimed at getting the country's economy growing again.
A higher rate of economic growth could theoretically increase the state's tax revenue without having to further increase taxes because total revenue would be higher. But Labor needs to strike a good balance between keeping taxes high enough to fund the country's depleted public services while leaving businesses enough money to invest and grow.
“The chancellor is walking a real tightrope here,” James Smith, an economist at ING, told CNBC’s “Squawk Box Europe” on Friday.
“Such regulatory changes – not just in finance but also in planning and other areas – if they do not stimulate the economy, I think we will see further tax increases again,” he said.
Former Bank of England deputy governor John Grieve last week expressed doubts that the measures would boost growth, saying neither financial services deregulation nor pension reform were “game changers”.
“I think she [Reeves] “We need to take greater action to stimulate private investment,” Gieve told CNBC on Friday, citing planning and infrastructure projects that are more likely to boost the economy.
The reforms came just over two weeks after Reeves' record tax and spending budget, which included 40 billion pounds ($51.8 billion) in tax hikes and changes to the country's debt rules – measures Reeves said were essential were to make up for the UK's gaping deficit.
The independent Office for Budget Responsibility said at the time that the measures were intended to boost the economy in the short term, raising its forecast for economic growth over the next two years by several percentage points but lowering it in the longer term. The OBR now expects the UK to achieve real GDP growth of 1.1% in 2024, followed by growth of 2% in 2025, before falling to 1.5%.
But businesses hit particularly hard by the sharp rise in National Insurance payroll tax said Labor's plans were likely to curb hiring and inhibit investment.
“The real risk for the chancellor – and for businesses too – is that if we don’t see this response filter through to growth, we will get more of the same in the next budget next year,” said ING’s Smith.
The Labor government did not immediately respond to CNBC's request for comment on further potential tax changes.
“Desperate” growth rates
Britain's economy barely grew in the third quarter, falling short of expectations with growth of 0.1%, data from the Office for National Statistics showed on Friday. Gross domestic product (GDP) fell by 0.1% in September, also below expectations and following growth of 0.2% in the previous month
“This is desperate growth. We have seen 1% growth since the financial crisis, or about 1% currently. That's 15 years. “So this is an established trend and we need to do something dramatic,” Gieve commented on the GDP data.
The third quarter was a time of great uncertainty in Britain as the government was accused of talking down the economy and spooking investors ahead of the October 30 budget.
As a result, some analysts argued that the government's budget plans and the growth agenda in general should be given more time to sink in.
“Measuring success in the very short term risks declaring the entire venture a failure before the first shoots even have a chance to surface,” Sarah Coles, head of people finance at Hargreaves Lansdown, said on Monday via email to CNBC.
Paul Dales, chief UK economist at Capital Economics, said plans over the coming months and years would likely be judged on how well economic growth meets OBR forecasts – with any tax changes likely to follow.
“If yes [growth] is weaker and that weakness is expected to continue, then this could mean that taxes need to rise further to meet projected tax revenues,” Dales said by email, noting that Capital Economics forecasts a slight increase in growth. If there were further pressure to increase government spending while everything else remained unchanged, higher taxes could be expected, he added.
Markets will now be watching to see whether the government's reforms can bring growth to Britain's struggling economy.
Still, Coles suggested that tax rises – at least in its next financial statement in March – were “highly unlikely”.
“There is always the chance that something will hit us out of the blue that will upend expectations, but at the moment Labor has committed to one big budget a year so anything substantive sooner would be a real surprise – “particularly after such a big fiscal year.” event in October,” Coles said.
“The coming months will give us a clearer picture of whether the government has struck the right balance.”
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