Rachel Reeves fails to rule out future tax rises as economy shrinks

Rachel Reeves failed to rule out further tax rises in the autumn as new figures showed the economy shrank more than expected in April.

The Chancellor has repeatedly said that the cost of Wednesday’s spending review is covered by the tax rises she brought in last year, saying departments must now “live within their means”.

But economists have warned that a weakening economy and additional commitments such as reversing much of the cut to winter fuel payments mean taxes are likely to go up again in the autumn.

Asked on Thursday whether she could guarantee there would be no further tax rises, Ms Reeves told LBC: “I think it would be very risky for a Chancellor to try and write future budgets in a world as uncertain as ours.”

But she again repeated her promise that she would not need to increase taxes on the same scale as last year, when she put them up by £40 billion.

And she rejected the suggestion that she was a “Klarna Chancellor” who had announced a “buy now, pay later” spending review.

She said: “The idea that yesterday I racked up a bill that I’m going to need to pay for in the future, that’s just not right.”

Shrinking economy

Her comments come as the Office for National Statistics reported that the economy shrank by 0.3% in April – the biggest monthly contraction since October 2023 and worse than the 0.1% fall most economists had expected.

In recent days, both Ms Reeves and Number 10 have said the economy is beginning to turn a corner, allowing them to fund the U-turn on the winter fuel allowance.

But Thursday’s worse-than-expected economic news will make it harder for Ms Reeves to balance her spending commitments with Labour’s promises on tax and borrowing.

The Chancellor acknowledged that the reduction in GDP was “disappointing”, and blamed “uncertainty” caused by Donald Trump’s announcement of sweeping tariffs at the start of April for much of the fall.

But opposition parties have laid the blame squarely with the Government, with Conservative shadow chancellor Sir Mel Stride accusing Ms Reeves of “economic vandalism”.

He said: “Under Labour, we have seen taxes hiked, inflation almost double, unemployment rise, and growth fall. With more taxes coming, things will only get worse and hard-working people will pay the price.”

“Wake-up call”

Daisy Cooper, the Liberal Democrats’ Treasury spokeswoman, said the figures should act as “a wake-up call for the Government which has so far refused to listen to the small businesses struggling to cope with the jobs tax” and urged ministers to pursue a “bespoke UK-EU customs union” to compensate for the impact of US tariffs.

The GDP figures come a day after the Chancellor revealed her spending plans for the coming years, including a significant increase in spending on the NHS, defence and schools.

The biggest winner was the NHS, which will see its budget rise by £29 billion per year in real terms, leading the Resolution Foundation’s Ruth Curtice to say Britain was slowly morphing into a “National Health State”.

But that rise came at the price of real-terms cuts elsewhere, including the Home Office, the Department for Transport and the Department for the Environment, Food and Rural Affairs.

On Thursday, Ms Reeves rejected claims that her decision on policing, which will see forces’ “spending power” increase by 2.3% above inflation each year, would mean cuts to frontline police numbers.