Budget tax rises may be ‘fiscal fiction’ as pain delayed for election year, IFS warns

Thinktank predicts backloading may force Labour to abandon tax rises or spending cuts

Rachel Reeves has positioned Labour to fight the next general election with tax increases and spending cuts that resemble a work of “fiscal fiction”, an analysis by leading economists has warned.

In its verdict on the chancellor’s budget, the Institute for Fiscal Studies (IFS) said the chancellor had chosen a high-risk strategy by backloading her plans to start just before voters go the polls in 2029.

Helen Miller, the thinktank’s director, said the budget plans would involve “near-heroic restraint in an election year” and suggested that Labour may ultimately be forced to abandon some of its tax-raising measures or planned spending cuts.

“[It is] a backloaded set of tax rises that almost entirely delay the pain. It’s reminiscent of the fiscal fictions of recent years. I hope this is a government able to deliver on its plans. But I have my doubts,” she said.

With Labour trailing Nigel Farage’s Reform UK in the opinion polls, the IFS said Reeves’s decision to freeze income tax and national insurance thresholds for an extra three years would hit workers in the pocket.

By 2029, more than a quarter of all taxpayers are expected to be dragged into the highest income tax brackets. Basic-rate taxpayers will be expected to pay £220 more tax each year by 2029, while those on a higher-rate will pay £600 more.

Reeves herself warned at last year’s budget that extending the freeze, first introduced by the Conservatives and now described by opposition parties as a war on the middle class, would hurt working people.

Separate analysis by the Resolution Foundation published on Thursday showed that almost three-quarters of the £77bn of extra tax over the next five years would come after April 2029 – with as much as £26bn in 2029-30 alone, when the next general election is expected.

Other budget measures due to come in near the end of the parliament include: a pay-per-mile levy on electric vehicles from April 2028, and a £2,000 annual cap on how much can be paid into salary-sacrifice pension schemes without incurring employer and employee national insurance contributions.

The government also plans to limit growth in day-to-day departmental spending to about 0.5% a year in real terms in the two financial years from April 2028, down from a previous assumption of about 1% a year.

The Resolution Foundation said the savings drive being pencilled in would amount to “pre-election austerity”, but the Treasury has argued that its savings will come from efficiencies rather than cutting services.

However, the IFS noted that successive governments had typically topped up spending plans. “Perhaps the government really will be able to find new efficiency savings. Or, maybe, when the time comes, and as the election looms it will find that the spending plans are unrealistically low,” Miller said.

Economists had warned ahead of last year’s general election that tough tax and spending decisions were needed regardless of the party forming the next government, amid increasing pressures on the exchequer from an ageing population, rising debt interest costs, and commitments to raise defence spending.

The IFS cautioned at the time that Reeves and her Conservative predecessor, Jeremy Hunt, were essentially locked in a “conspiracy of silence”, accusing both of making unrealistic tax and spending promises.

In her make-or-break budget on Wednesday, Reeves announced £26bn of tax rises targeted at Britain’s wealthiest households to help plug a gaping shortfall in the public finances.

However, the IFS suggested Reeves could have avoided tax rises on this scale after she received much stronger forecasts for the public finances from the Office for Budget Responsibility (OBR) than initially feared. “In the event, there was no big fiscal repair job [required],” said Miller.

Taken together, the OBR said tax increases and spending cuts announced by the chancellor had helped to overturn a £4bn projected shortfall against her self-imposed fiscal rules to rebuild headroom worth £22bn – significantly above expectations.

The IFS commended Reeves for raising her fiscal buffer to guard against future intense budget speculation, and suggested rising pressures on government spending would make it difficult for any chancellor to find sizeable cuts.

Miller added: “This felt mostly like the budget of a government trying to scrape through. Of course, no fiscal event can do everything, and reform is hard.

“But given the scale of the challenges we face, and given the government’s lofty rhetoric about change, and its ambitions on growth, I think we’re entitled to ask for more.”