Britain is locked in a “growth emergency”, a senior cabinet minister has admitted, just hours after Rachel Reeves was dealt a fresh blow over the UK’s economic outlook.
Two days before the chancellor stands up to deliver her second Budget, the government has been hit by revelations that the Office for Budget Responsibility (OBR), the leading economic watchdog, will downgrade the country’s prospects and reduce its estimates for economic growth for every year until 2029.
The projections are expected to be the most pessimistic since the OBR was set up 15 years ago in the wake of the financial crisis.
The news could not come at a worse time for the chancellor whose own job is believed to be on the line in a make or break Budget – just 18 months after she arrived in the Treasury with a “no 1 mission” of growing the economy.
Experts have also piled on the pressure, warning that measures expected in Ms Reeves’ Budget on Wednesday – including a form of mansion tax on high-value properties as well as a bank levy – will harm economic growth.
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Speaking to business leaders at the CBI conference in Westminster, business secretary Peter Kyle admitted that the UK was in a “growth emergency”.
“We inherited a situation when we came into office where we [were] stuck in this buy-slight grip of high taxes and low growth, and we are not going to break out of this cycle unless we do some pretty profoundly different things”, he said in a bid to blame the Labour government’s inheritance.
“I really think we have inherited [a] growth emergency, and we are still in it, and we will be in it for as long as we are unable to get our way out of this situation without increased economic productivity.”
But speaking to journalists at the conference after his speech, Mr Kyle claimed there was “a lot of reason for optimism” in the economy.
He also cited changes to the planning system that would, for instance, support Heathrow expansion, as well as the UK’s post-Brexit reset deal with the EU and the expanded global talent visa.
However, his speech came amid warnings from businesses that instability and briefings in the run-up to the Budget – along with extra taxes on the private sector and a new wave of employment rights – had massively damaged growth in the UK.
In her speech, CBI director general Rain Newton-Smith issued a challenge to the government: “If you really believe in economic growth, prove it.”
She warned that instead of producing economic growth, the businesses which were needed to deliver it were facing a “death by a thousand taxes”.
Meanwhile, Helen Miller, director of the Institute for Fiscal Studies, said Ms Reeves risks “increasing taxes that are bad for growth”, telling Times Radio that “investors will be nervous” if they see a list of tax increases.
“The danger is that if you do lots of small things, often our smaller taxes are particularly badly designed and therefore you can end up increasing taxes that are bad for growth.
“Investors will be nervous if they see a list of tax increases, but don’t quite trust how much revenue it will bring in,” she said.
Meanwhile, Tory leader Kemi Badenoch sought to capitalise on Labour’s economic woes.
She accused Rachel Reeves of preparing to announce tax rises “dressed up as necessities. They are not. We need to cut spending”. She also called on the chancellor to make “one easy cost-free decision they can take: scrap the employment rights bill”.
Ms Reeves is reportedly set to impose a new mansion tax on more than 100,000 high-value properties as she seeks to raise money to fill the financial black hole, having reportedly scaled back plans for a property tax.
She is expected to apply a tax to homes worth more than £2m in a move which could raise between £400m and £450m for the Treasury.
Ms Reeves will deliver her Budget on Wednesday after a whirlwind of speculation about which taxes she will hike to help balance the books, including the expectation – and then apparent U-turn on – an increase to income tax.
The OBR will publish its latest forecasts following the chancellor’s Budget speech, with sources telling Sky News that it will downgrade its growth predictions for 2026 and for the remaining years of the current parliament.
The downgrade is a result of a drop in expected productivity in the UK as part of a readjustment of previously incorrect estimates. However, Ms Reeves’ own moves will also be blamed, including imposing a hike in employer national insurance contributions in what has been dubbed “the jobs tax”.
The OBR is an independent body which provides analysis of the nation’s public finances and was set up in 2010 by former Tory chancellor George Osborne in the wake of the 2008 financial crash.
Twice a year, it publishes detailed five-year forecasts alongside the Budget and spring statement to assess the impact of any tax and spending measures and analyse whether the government is meeting its fiscal targets.
Earlier this year, it was reported that the OBR had planned to downgrade its official productivity forecasts, leaving a gap in the public finances of around £20bn and prompting fears of widespread tax rises to fill the gap and rescue Britain’s ailing public finances.
An extension of the freeze on income tax thresholds is among rumoured measures and would see more people dragged into paying tax for the first time or shifted into a higher rate as their wages go up.
Among the “smorgasbord” of tax rises which are expected, Ms Reeves is also set to scrap the two-child benefit cap and is expected to introduce a gambling tax.
The latest reports about the OBR’s growth downgrade came just hours after Mr Kyle apologised for the speculation around the Budget and said that rumours have been “as frustrating for me and the chancellor as it has for everyone else”.
He told BBC Breakfast there is “intense pressure” on ministers to be “open about the direction of travel… while staying within the confines of what’s acceptable for a Budget”.
“I’m sorry that people have been anxious about all the speculation; it’s been as frustrating for me and the chancellor as it has for everyone else”, he said.
The Treasury has been contacted for comment.
