According to a think tank report released on Monday, British finance minister Rachel Reeves is facing a significant challenge to meet budget rules, with a potential deficit of £4.4 billion ($5.7 billion). The Resolution Foundation advised caution in implementing tough measures, suggesting a careful approach to possible welfare spending cuts in Reeves' upcoming budget update speech on March 26, and recommending consideration of tax increases instead.
James Smith, research director at the Resolution Foundation, highlighted the deteriorating economic outlook in the UK, projecting a shift from a projected surplus of £10 billion to a deficit of around £5 billion due to weaker growth and anticipated higher interest rates.
The Office for Budget Responsibility is expected to drastically reduce its 2.0% economic growth forecast for 2025, in line with the Bank of England's revised projection of 0.75%. The foundation also predicted a similar figure.
The strain on public finances has been exacerbated by unexpected increases in borrowing costs in global financial markets, largely influenced by the economic policies of U.S. President Donald Trump.
Smith emphasized the necessity for Reeves to take decisive action to meet fiscal rules by 2030, aiming to balance public spending with tax revenues, but stressed the importance of avoiding burdening low-income households.
Continuing to dismiss tax increases may pose challenges for future budgets, as fiscal pressures are expected to persist, Smith warned.
Reeves and Prime Minister Keir Starmer vowed not to raise income tax, value-added tax, or corporate tax rates in last year's election. One potential approach they could consider is extending the freeze on income tax thresholds until 2030, which could generate substantial revenue.
(Note: Currency exchange rate provided: $1 = £0.7735)