There is mounting speculation that the Chancellor may be forced to raise taxes in the Autumn Budget to keep pace with Government borrowing.
In the Spending Review, Rachel Reeves unveiled a number of spending commitments, including £14.2 billion for nuclear infrastructure, an extra £29 billion a year for the NHS and £39 billion for social and affordable housing, as well as a boost to education, defence and science and technology.
However, industry experts have warned that the sharp rises in spending may lead to significant tax rises in the coming months.
Lindsay James, investment strategist at Quilter, said: “The high level of uncertainty around the next Autumn Budget, including what the shortfall will be and how it will inevitably be filled with tax rises, has also been weighing on growth. Yet the pressure to increase spending has continued, and today’s spending review will have done little to quell fears that further tax rises are still to come.
“While the Chancellor laid out her plans to spend, it’s not clear where any cuts will come from. For example, a 3% real terms commitment to the NHS implies real terms cuts will be needed elsewhere, yet there was simply no mention of this.”
Laith Khalaf, head of investment analysis at AJ Bell, commented: “This was the Chancellor’s last scheduled foray into the national limelight before the Budget in the Autumn and attention will now turn to what tax rises might be in the post.
“Whether the Chancellor will now have to raise more money in this year’s Budget and how much that will be won’t be clear until nearer the time. There’s a lot of economic data to unfold between now and the Budget and better than expected economic growth or looser monetary policy could ride to the rescue. Equally, the fiscal position could deteriorate before the Budget, leaving an even bigger black hole to be filled by tax rises or welfare cuts.”
Khalaf said that amid growing fiscal pressure, there’s a risk that pension tax reform speculation will return to the headlines.
“Rather than let uncertainty rattle savers, the Chancellor should take pre-emptive action and introduce a Pensions Tax Lock, ruling out changes to tax-free cash or pension tax relief for the rest of this Parliament,” he added.
Sarah Coles, head of personal finance at Hargreaves Lansdown, echoed the sentiment: “The Government may well have to explore its options but it also needs clarity as quickly as possible. The risk is that the debate encourages knee-jerk reactions as people panic about potential changes which leave them worse off in the long-run.”
Coles said speculation around the potential reinstatement of a pension lifetime allowance is “supremely unhelpful”, pointing out that it risks undermining confidence in the system and puts people off making contributions.
“Pensions are a long-term game and people need a stable system in which they can plan. It’s hard to see why a lifetime allowance would be needed when there are already annual limits. It effectively becomes a limit on investment growth.
“Its abolition was fraught with difficulty and reintroducing it would cause even more confusion,” Coles said.
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