Rachel Reeves’s plans to raise taxes and spending in the Budget will wipe £20bn of potential growth from Britain’s economy, a Wall Street bank has warned.
The Chancellor is expected to lay out a £40bn plan to shore up the public finances when she delivers her Budget on Oct 30. The vast majority is expected to come through tax increases, with employers’ National Insurance contributions, capital gains and inheritance tax expected to be targeted.
Writing in the Financial Times on Thursday, Ms Reeves said “taxes will need to rise” in order to meet her fiscal rules.
Analysts at Citigroup warned that the Chancellor’s “near-term fiscal tightening in the autumn” would harm growth next year. The higher tax burden will hold back GDP growth by between 0.5 and 1 percentage points, Citi said.
This is equivalent to around £20bn of lost expansion.
Economists at the Wall Street bank wrote: “Since the start of 2024 the UK has enjoyed stronger-than-expected GDP growth … In more recent months, however, activity has turned down … Here after a period of increasingly expansionary fiscal and tightening monetary policy, material headwinds now loom.”
It comes as Ms Reeves’s “gloomy” rhetoric ahead of the Budget was blamed for a downturn in business confidence that led bosses to cut staffing for the first time this year.
Closely-watched PMI data showed job numbers decreased in October for the first time since December 2023. It also showed Britain’s private sector grew at its slowest pace in 11 months.
The survey found that bosses said clients were delaying decisions amid heightened economic uncertainty ahead of the Budget on Oct 30.
Chris Williamson, the chief business economist at S&P Global Market Intelligence, said: “Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending.
“Companies await clarity on government policy, with conflicts in the Middle East and Ukraine, as well as the US elections, adding to the nervousness about the economic outlook.
“Worryingly, the deterioration in business confidence in the outlook has also prompted companies to reduce headcounts for the first time this year.”
PwC warned earlier on Thursday that consumer confidence has fallen to its lowest level so far this year in the run up to the Budget.