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There were no tax changes in the Spring Statement, as expected, but any sense of relief for our personal finances should be tempered with caution. By the time the autumn Budget comes around, I fear tax rises will be very much back on the agenda.
The halving of this year’s UK economic growth forecast from the Office for Budget Responsibility was a heavy blow. Rachel Reeves’ verbal blame game might have shifted from “black holes” towards “global uncertainty”, but the downgrade had less to do with Trump’s threatened tariffs and more to do with her £24bn increase to employers’ national insurance contributions.
The biggest tax-raising measure in last October’s Budget will only take effect from next month, meaning the UK economy has yet to feel the full force of the impact. It will almost certainly increase both unemployment and inflation as businesses cut jobs and put up prices to compensate, while even the OBR documents estimate three-quarters of the cost will be passed on to workers “via lower real wages”.
This gave a hollow ring to the chancellor’s comments about protecting working people from the impact of higher income taxes, national insurance or VAT — good luck negotiating your next pay rise.
Nevertheless, Reeves did a good job of sounding very enthusiastic about lots of very small numbers. Overall headroom against the fiscal rules is still minimal, thus the threat of future tax rises remains.
Attempts to drive growth through planning reforms, increased defence spending and relaxing financial regulation may be the right thing to do, but none will move the needle very much, and the weaker jobs market means consumer confidence is already under pressure. The OBR’s projection that average mortgage rates will stay high, as more borrowers roll off low-rate era deals, does not suggest people will spend more, as household finances remain constrained.
However, one very big number stood out — the £105.2bn cost of servicing interest on government debt pencilled in for this year, which is more than the combined budgets for defence, the Home Office and Ministry of Justice combined.
This underlines how much the chancellor is at the mercy of the markets. With so much domestic and global uncertainty around — including the unknown impact of a global trade war — it wouldn’t take much for borrowing costs to move up a notch and turn the OBR’s small black numbers into larger red ones.
So what could it all mean for our personal finances? While the chancellor was careful not to breathe a whisper about tax rises on Wednesday, if the search for growth proves fruitless, it’s harder to see how she could avoid them. This risks repeating months of damaging tax speculation seen in the run-up to last October’s Budget, as investors tried to second guess where the chancellor’s axe might fall.
The most respected tax experts in the country have urged the government to stop fiddling and be brave enough to consider bold reforms to simplify the system and address long-running problems in a bid to boost growth and productivity. I doubt the politicians will listen.
For now, a sentiment commonly expressed by FT readers is to keep maximising your tax allowances before the government further reduces them. I am not surprised to see that investment platforms have reported unusually high inflows this year — a phenomenon dubbed “The Reeves Effect” — and I predict April’s new tax year will prove no different.
The Spring Statement documents confirmed options for reforming Isas are still being considered, with a desire to “get the balance right” between cash and shares to “boost the culture of retail investment” in the UK. Yet a culture of fear is hanging over retail investors as we wait to see what rule changes and tax rises October’s Budget will bring.
Claer Barrett is the FT’s consumer editor and author of the FT’s Sort Your Financial Life Out newsletter series; claer.barrett@ft.com; Instagram and TikTok @ClaerB
