Rachel Reeves could possibly be compelled to boost taxes AGAIN regardless of OBR warning burden is ALREADY hitting economic system – as Middle East warfare threatens to wipe out her ‘headroom’

Rachel Reeves could be forced to hike taxes yet again as the Middle East crisis threatens to wreak more havoc on the economy.

The Chancellor has already imposed an astonishing £75billion a year of extra tax on Britons, with the Spring Statement yesterday revealing that the burden is heading to a new record high.

Much of that has gone on spiralling welfare costs, with Labour MPs forcing the government to abandon efforts to curb spending and scrap the two-child benefits cap.

But although Ms Reeves boasted about the government’s finances improving, the Treasury’s OBR watchdog made clear she is balancing the books largely on the basis of a tax windfall from surging stock markets.

The watchdog cautioned that a 35 per cent correction would add £26billion to borrowing, effectively wiping out the Chancellor’s ‘headroom’ for hitting her main fiscal targets. 

The FTSE 100 has lost around a month of gains over the past few days, after Donald Trump’s strikes on Iran triggered global panic.

As well as the impact on savings and pensions, Brits are facing eye-watering increases in energy bills, while inflationary pressures now look set to stop the Bank of England cutting interest rates this month.  

The OBR documents accompanying Ms Reeves’ Spring Statement showed that even before the crisis the tax burden was ow on track to reach never-before seen mark of 38.5 per cent of GDP in 2030-31.

That is even higher than the 38.3 per cent the watchdog envisaged in November.

A million pensions face being dragged into the tax system by the ‘stealth raid’ of freezing thresholds for longer.   

The OBR raised concerns the Government is relying on a small base of better-off taxpayers for the bulk of revenues, while the ‘stealth raid’ of freezing earnings thresholds is very sensitive to changes in inflation and earnings.

David Miles of the OBR said this morning that it was investigating how much damage the high taxes were doing to the economy. 

He told the BBC Radio 4’s Today programme: ‘It’s very difficult to increase taxes faster than GDP – which is what’s needed really to bring the fiscal situation back under control – it’s difficult to do that without doing some damage to incentives to invest, work, save…’

He said the OBR already has ‘a view that it is eroding somewhat what you might call the productive capacity of the UK.’

‘I think having to raise taxes faster than GDP, it is very difficult to do that without having some knock-on effects which are probably on balance negative on employment, productive potential of the economy,’ he added.

The IFS think tank said meeting the Nato commitment to spend 3.5 per cent of national income on defence – from 2.4 per cent currently – would cost £35billion a year in today’s terms.

That is equivalent to the budgets of the Ministry of Justice and Home Office combined, and would tax rises of the order of 3 to 3.5 percentage points on the main rate of VAT.

IFS director Helen Miller said: ‘The takeaway is that we should not expect the Government to be able to meaningfully increase what we spend on defence – if that’s what it decides it wants to do – without significantly cutting other Government programmes or raising taxes.’

She said the events in the Middle East and the market reactions represented the ‘big economic news’ on Wednesday, rather than the spring statement delivered by Rachel Reeves.

Ms Miller added: ‘Gas prices rose by more than 20% yesterday and are up almost 80% compared to Friday. The stock market fell almost 3%. The cost of borrowing rose sharply. Maybe these changes will be short-lived. There are many days with large market moves that we quickly forget.

‘But if war in the Middle East drags on that will be unambiguously bad news for all of us, including for the Chancellor.

‘On the economic front, higher oil and gas prices and more economic uncertainty would drag on economic growth. Disposable incomes would fall as inflation rises. Higher inflation would likely mean higher interest rates.

‘We should all hope that we are not facing a protracted conflict.’

Paul Dales, chief UK economist at consultancy Capital Economics, said that while the OBR forecasts on the face of it gave the Chancellor ‘a bit more money to play with’ in the autumn Budget ‘that could be swamped by events in the Middle East’.

He added: ‘The economics could therefore point to more tax hikes.’

In a low-key update to MPs yesterday, the Chancellor insisted Labour had ‘restored economic stability’ and was finally getting to grips with inflation, which she said was needed more than ever given the Middle East crisis.

In a warning against a lurch to the Left following last week’s by-election defeat by the Greens, she urged Labour to resist ‘the temptation of easy answers and reckless borrowing’.

Ms Reeves defended her unprecedented tax raid, saying Labour was ensuring ‘those with the broadest shoulders pay higher taxes’.

But in another gloomy assessment, the OBR forecast that unemployment will rise to 5.3 per cent, equalling the worst highs seen during the pandemic.

It said ‘worrying’ youth unemployment figures – partly spurred by higher minimum wages that have deterred employers hiring young people – had ‘a little way further to run’.

Ministers are still mulling whether to press ahead with manifesto plans to equalise the minimum wage for the under-21s with the main adult rate amid warnings it will deepen the crisis.

Former chancellor Sir Jeremy Hunt said tax levels had already been pushed so high they are damaging the economy.

Sir Jeremy said the £66billion in tax hikes imposed by Ms Reeves in her first 18 months in office were equivalent to £2,300 per household.

Urging her to target welfare cuts instead, Sir Jeremy told her: ‘If the cost of living is the real concern, is the biggest mistake not to increase taxes by £66billion, which is the equivalent of nearly £2,300 per household?

‘If that money is needed for public services, nearly all of that – £54billion, in fact – could be got by reducing the welfare bill to 2019 levels.

‘Is it sustainable to keep raising taxes on people in work in order to pay ever more benefits to people not in work?’

The Treasury has stressed that there were no tax or spending measures announced at the Spring Statement, as part of the new commitment only to have one fiscal event a year. That will be the Budget in the Autumn.

The OBR’s historic database of Budget measures shows Ms Reeves has been ‘scored’ as adding £75.1billion a year to the tax burden since entering No11 in July 2024.

The staggering tally makes her the biggest tax-raising Chancellor in the last six decades, far ahead of her nearest competitor for the dubious distinction.

That was fellow Labour politician Gordon Brown, whose fiscal statements added up to an extra £62.1billion.

Rishi Sunak came in third with £54.9billion of tax rises announced, as he struggled to cope with the fallout from Covid and the Ukraine war. Norman Lamont’s increases in the 1990s were assessed as £41.7billion and George Osborne‘s £41.6billion. 

The OBR maintains figures for all the tax policies ‘scored’ at fiscal events since 1970, adjusted for GDP growth to the present day. 

The numbers do not account for measures raising more or less than anticipated – and miss out some smaller changes up to the watchdog’s creation in 2010.

However, they give the best indication available of the size of packages announced by Chancellors.