British workers could face another £10bn stealth tax raid to shore up the public finances and pay for more defence spending, a top economist has warned, as Europe risks losing American military backing. Sanjay Raja, economist at Deutsche Bank, estimates Rachel Reeves would need to spend an extra £15bn to push the defence budget to 2.5pc of GDP, from just over 2pc now.
Between £5bn and £10bn could come from squeezing other departments including justice, local government and the environment. “It’s also possible that Chancellor Reeves opts to raise stealth taxes, via an extension of the fiscal drag to pay for a bigger defence budget,” said Mr Raja.
“This would give the Chancellor something like £8bn to £10bn per year in tax revenues, rebuilding the Treasury’s buffer against its fiscal rules whilst also addressing its defence spending ambitions.”. That suggests extending the Conservatives’ freeze on income tax thresholds which has forced more workers into paying income tax, and into higher tax brackets, even if their earnings have not kept up with inflation.
The freeze is currently set to end in April 2028. Another option is to borrow more for military kit, as this counts as investment spending, which is allowed under Ms Reeves’s fiscal rules. Ed Balls, formerly a Labour shadow chancellor, said Ms Reeves should look at abandoning the borrowing rules for defence.
“There is a case for the UK Treasury saying that, for a fixed period, we’re going to carve the uplift in defence spending outside the fiscal rules,” he said in his podcast with George Osborne. “I think that is much more credible than a massive tax rise, and I think it is much more credible than undeliverable public spending cuts the markets won’t believe in.”.
After this morning’s public finances figures, which showed disappointing tax receipts in January, Darren Jones, chief secretary to the Treasury, called the rules “non-negotiable”. “We will never play fast and loose with the public finances,” he said.
Read the latest updates below. Thanks for joining us today here on our live blog on the UK economy. You can keep up to date with all the latest from The Telegraph on business and economics here. Thousands of farms are already disappearing as the industry braces for Rachel Reeves’s inheritance tax raid to take effect in April.
Twice as many agricultural businesses are closing down as are opening, according to analysis of Office for National Statistics (ONS) data by Cynergy Bank, as the gulf between company deaths and births widens. In the final months of 2024, 1,370 businesses in agriculture, forestry and fishing shut their doors for good. Only 670 new companies were founded in the industry, less than half as many.
Over the past three years a total of 16,905 have closed in the industry, with 9,055 opening, leaving a net loss of 7,850 businesses. Nick Fahy, the chief executive of Cynergy Bank, said it showed “a sobering picture of the UK business environment”.
Read the full story... Rachel Reeves’s tax-rising Budget has had “a chilling impact on confidence, hiring and investment”, a leading economist has said. Julian Jessop, an economics fellow at the Institute of Economic Affairs, said: “This week’s economic data has added to evidence that the UK is heading for a bout of stagflation; private sector activity has stalled, inflation is picking up again, and job insecurity is rising too. Even if this bout is mild by past standards, the economy is performing well below the numbers baked into last October’s Budget.
“This partly reflects a more challenging international environment – the EU’s major economies are also struggling with weak growth and higher inflation. But the turnround in the UK since last summer has been much sharper and this is undoubtedly due to the fallout from the Budget.
“The increases in tax and other business costs have had a chilling impact on confidence, hiring and investment. Firms are also worried about the additional burdens from tighter employment regulations and the rush to decarbonise the grid. “Higher inflation will undermine two of the foundations of any recovery in consumer spending, by eating into the gains in real incomes and dampening hopes of further reductions in interest rates. The Bank of England is now unlikely to cut again until May.
“In the meantime, the economy has to weather another fiscal statement and a tight spending review. Further tax increases are not yet inevitable, because there are many moving parts in the OBR’s forecasts, but they are increasingly likely as revenues fall short and borrowings costs remain higher for longer.”.
Shares fell on Wall Street, edged higher in Europe and were flat in London amid uncertainty across both sides of the Atlantic. The FTSE 100 was essentially unchanged, while the FTSE 250 fell less than 0.1pc. It came on a day where new figures said that employers were cutting staff sharply ahead of a major rise in National Insurance contributions. The pan-European Stoxx 600 rose 0.5pc.
