Rachel Reeves faces £5bn fiscal hole after welfare reform U-turn

Rachel Reeves gave a dark reminder of the fragility of public financial resources when the UK’s Financial Supervision Authority admitted on Tuesday that its forecast – which has its economic strategy – was repeatedly optimistic.

On the day the counselor faced a 5 billion pounds of financial hole, established by the government Surrender to reform luxuryThe budget responsibility office said that it was regularly reduced the government’s borrowing within a five -year horizon, while exaggerating the growth estimate.

The analysis of the OBR’s “prediction assessment report” included expectations since its inception in 2010. Any discounts of OBR expectations before the autumn budget from Reeves will add to its escalating financial and political problems.

What are the new pressure on Reeves?

Many Labor Party deputies blame the well -being of the well -being, and they now want to reduce the image of the “iron advisor” that it declares itself.

The welfare of the 5 billion pounds of the Malat government, which avoided a Backbench huge rebellionShe followed the advanced Reeves decision to rewrite her plan to reduce fuel payments in the winter for retirees, costing an additional 1.25 billion pounds.

The Labor Party deputies, who feel the political weakness of Rvesz, are also pushing to cancel the ceiling of benefits. The ministers confirm that the problem is on the table and a decision will come in the fall.

These changes in politics will be burned through about 9.9 billion pounds from “Headroom”, which has allowed itself against its financial bases in its spring statement in March.

Debt interest costs are not currently working as a preposition on OBR expectations, unlike this year when they carved a hole in the narrow head room of the advisor leading to the March Spring statement.

But this position can easily change with market movements and the advisor is still completely vulnerable to lowering expected cuts. On average government borrowing exceeded 3.1 percent of GDP in a five -year horizon, OBR a report He found.

He said that this reflects the excessive optimism of OBR on the numbers of gross domestic product and the legal requirements of the agency preparing its expectations on government plans.

What can the financial rules extend?

Efforts to maintain good relations with Donald Trump can be proven to the United Kingdom.

British officials admit that Canada’s decision Cancellation of digital services tax In an attempt to soften trade relations with the American president, it can lead to the renovation of pressure on the United Kingdom to abandon its equivalent tax, which targets American technology companies.

The digital tax on the right path to achieve 1.2 billion pounds annually for the Treasury Treasury at the end of Parliament, according to OBR expectations.

Another blow can stem from The last G7 Agreement The United States must host the multinationals of the corporate tax deal. Expectations in the United Kingdom indicate that tax revenue under the so -called corner will reach 1.5 billion pounds annually by the end of Parliament.

A spokesman for the Treasury said: “The full details of the column must be negotiated on more than 140 countries, and any changes in the subsequent UK policy will be costly through OBR in the normal way.”

Can Reeves find new savings to fill the hole?

Last week, in Westminster, work representatives did not tend to support new spending discounts to help Reeves in the book balance.

The counselor has just completed a narrow review of the spending for only three years, as daily spending will be increased by government departments by only 1.3 percent, in real terms of 2026 by rising. Some departments face real pieces.

Angela Rainer, Deputy Prime Minister, is among those who defend higher taxes on the wealthy instead of reducing services and benefits for ordinary voters.

Will Reeves change its financial rules?

A survey of survival recently found that 54 percent of labor representatives believe that the government “must reform its financial bases in order to finance public investment and spending” through high borrowing.

Annelies Dodds, the former Minister of International Development, led calls to reconsider the rules. In February, she resigned in protest against discounts in the aid budget, saying, “Our financial rules and tax approach must be seen again.

On Tuesday, Reeves refused to explicitly exclude the bases, but noticed that she changed her in the budget last year to allow further borrowing for investment. The Treasury says that the rules are “negotiable.”

Cathal Kennedy, UK’s chief economist at RBC Capital Markets, warned that changing financial rules will harm the consultant’s credibility with investors and put their job at stake.

“I don’t think the market is in mood for financial dilution in the UK,” he said. “I have seen the reaction to the budget, and you can see what is happening for the long end of [yield] curve.”

Is the tax increase inevitable?

Yes, according to many economists. Capital Economics analysts estimate that the consultant faces a 13 billion pounds of financial hole to 23 billion in autumn due to benefit and luxury to reach OBR discounts.

Reeves problem is that the Labor Party statement has excluded an increase in the number of large adults in revenue: income tax, value -added tax and national insurance employees. “We are standing next to this commitment,” Reeves told the deputies on Tuesday.

The Treasury discussed in the past – but it has not yet been implemented – an extension after the year 2028 of the freezing of income in income tax allowances and thresholds, which could generate about 8 billion pounds annually.

“It has ended with hundreds of thousands of retirees who have to fill tax declarations. It will also be very unlucky. But there are no easy options,” said one of Reeves ally.

The choice of height in smaller taxes risks the creation of major political problems in order to obtain few financial gains, as conservative consultant George Ospurne learned in 2012 the “pie tax” and discovered Reeves in her battle with farmers on the inheritance tax.

The city of London and the wealthy are clear targets – but Reeves are fully aware of the danger of driving companies and wealthy people outside the country.

“We are not stupid,” one of them said the pioneer in the city. “There is a group of work deputies looking for ways to raise more money.”