Middle East war may force Rachel Reeves to raise taxes AGAIN despite warning burden is ALREADY hitting economy – as new report warns of impact on inflation and GDP

Middle East war may force Rachel Reeves to raise taxes AGAIN despite warning burden is ALREADY hitting economy – as new report warns of impact on inflation and GDP

Rachel Reeves may be compelled to implement another tax increase as the Middle East crisis intensifies, raising concerns about its further strain on the economy. The Chancellor has already added £75 billion in extra taxes annually to Britons’ income, with the Spring Statement yesterday highlighting that this burden is set to reach a new peak.

Significant portions of this tax burden have been directed toward escalating welfare costs, as Labour MPs pushed for the government to abandon efforts to limit spending and eliminate the two-child benefits cap. Yet, despite Ms Reeves’ claims of improved fiscal health, the Treasury’s OBR watchdog noted that the government is largely balancing its books on a windfall from booming stock markets.

The OBR warned that a 35 per cent drop in stock values could add £26 billion to borrowing, effectively neutralizing the Chancellor’s flexibility in meeting her key fiscal goals. Recent volatility in the FTSE 100, following Donald Trump’s attacks on Iran, has already erased a month’s worth of gains, fueling fears of economic instability.

Bloomberg Economics analysis suggests prolonged Middle East hostilities could depress GDP growth and elevate inflation if oil prices remain elevated. A scenario involving the closure of the strategically vital Straits of Hormuz and oil reaching $108 per barrel would reduce GDP by half a percentage point and raise inflation by over a point. A less severe outcome, with oil prices around $80, would still result in a 0.3 point GDP decline and a 0.5 point inflation increase.

OBR reports accompanying the Spring Statement revealed that the tax burden is already on course to surpass 38.5 per cent of GDP by 2030-31, exceeding the 38.3 per cent forecast from November. This trend threatens savings and pensions, with a million pensioners at risk of being taxed more heavily due to frozen income thresholds.

David Miles of the OBR 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 emphasized that the OBR already perceives high taxation as diminishing the UK’s productive capacity. ‘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 and the economy’s productive potential,’ Miles added.

The IFS think tank noted that achieving NATO’s 3.5 per cent defense spending target – up from the current 2.4 per cent – would cost £35 billion annually. This equates to the combined budgets of the Ministry of Justice and Home Office, potentially requiring VAT rates to rise by 3 to 3.5 percentage points.

IFS director Helen Miller stated: ‘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.’

Mrs Miller also highlighted that recent market fluctuations, including sharp jumps in gas prices and steep declines in the stock market, represent the ‘big economic news’ of the day, overshadowing the Spring Statement. She noted that gas prices rose over 20 per cent yesterday and climbed nearly 80 per cent from Friday, while borrowing costs surged sharply. However, she cautioned that these shifts might prove temporary, with market movements likely to continue fluctuating significantly.