Labour’s crackdown on immigration could force Rachel Reeves to raise taxes, the UK’s most highly-respected think tank has warned.
The Institute for Fiscal Studies warned low immigration levels could lead to a shortfall in tax receipts and trigger “another tough Autumn Budget” later this year.
That could see her forced to hike taxes or cut public spending to balance the books, it said.
If net migration continues to fall, or stabilises at a level significantly below official forecasts, this would “be likely to materially hit (economic) growth… and overall tax revenues”, the IFS warned.
The chancellor unveiled a £40bn tax rise in her 2024 Budget in a bid to boost public services and grow the economy. She then announced another £26bn worth of tax hikes in last year’s Autumn Budget.
The IFS warning comes just days before Ms Reeves’ spring statement to Parliament, where she will set out the state of the UK economy and how it could impact government spending, which the experts said should “largely be seen… as setting the scene” for what happens in the Budget.
The updated forecasts Ms Reeves will outline are “likely to contain indications of potential risks looming on the horizon – risks which, if crystallised, could raise the spectre of another tough Autumn Budget,” the IFS said. These include a potential shortfall in tax receipts caused by a larger than expected decline in immigration.
Successive governments, including Labour, have announced crackdowns on migration since the figures hit nearly a million in just 12 months in 2023.
These attempts have proved extremely successful – with numbers dropping by two-thirds in a single year, driven by a huge fall in people coming to the UK for work or study.
But the steep drop also means less money paid in taxes to the Treasury.
New immigrants are disproportionately more likely to work and less likely to make heavy use of health and care services, the IFS said, mainly because they are more likely to be of working age. In most cases, they are also not able to claim benefits, at least in the first few years after arriving in the UK.
In November, the OBR forecast that net migration would fall from a peak of around 900,000 in 2023 to around 260,000 in 2026 and 2027, before rising back to 340,000 by 2030.
However, the most recent figures, released just after last year’s Budget, put the provisional figure for 2025 at 204,000, considerably below the 290,000 forecast.
If net migration numbers continue to drop, or settle at a level significantly below the Office of Budget Responsibility’s forecasts, this would “be likely to materially hit growth… and overall tax revenues”, the IFS warned. It said the issue has the “potential to put a dent in the forecast for tax revenues”, including when Ms Reeves has to meet her self-imposed fiscal rules again in the Budget.
Nick Ridpath, a research economist at the IFS and one of the authors of the analysis, said: “‘The OBR will likely wait for more data before updating its medium-term outlook, but if recent trends do continue, the chancellor’s fiscal rules could come back into focus by the Autumn Budget.”
Ms Reeves’s rules prevent her from borrowing to pay for day-to-day spending and require debt to fall as a percentage of GDP by 2029/30, limiting her ability to deal with shortfalls.
Last week the IFS said Ms Reeves should scrap her self-imposed rules on debt and borrowing to halt the “dysfunctional” policymaking behind Britain’s economic uncertainty”.
In a statement, The Treasury said: “The government has the right economic plan to build a stronger and more secure economy.
“We are cutting the cost of living, cutting the national debt and creating the conditions for growth and investment in every part of the country. And have doubled the buffer against the stability rule to £21.7bn, the highest level since 2022.”
