Pensioners and the wealthy could face a shock tax raid by Rachel Reeves at the autumn Budget if the worsening economic forecast fails to improve, leading economists have warned.
Paul Johnson, the director of the highly-respected Institute for Fiscal Studies (IFS) think tank, raised concerns in his post-spring statement briefing that the chancellor has not left herself enough headroom in the finances to withstand challenges in the economy.
In particular, the threat of Donald Trump imposing wide-ranging trade tariffs on top of the 25 per cent he announced on car imports on Thursday would leave Ms Reeves with a black hole.
Mr Johnson warned the chancellor had left herself exposed to minor forecast changes and warned there was a “good chance” she would need to raise taxes in October.
He said he was concerned pensions “look like a juicy place to go for a lot of money”.
“That risks months of speculation over what those tax rises might be – a raid on pensions, a wealth tax on the richest, another hike to capital gains tax?”
He also warned that “mere speculation about increases can cause economic harm.”
The respected economist’s suggestion would help Ms Reeves appease rising anger among Labour MPs and trade unions over the £4.8bn wealth cuts, with warnings that her measures will leave the poorest £500 worse off instead of putting an extra £500 in people’s pockets.
Such was the political anger over the impact of benefits cuts and loss of money for carers that work and pensions minister Stephen Timms was forced to answer an urgent question in the Commons on the issue on Thursday.
The left of the Labour Party and unions have called for a specific wealth tax to balance the books rather than putting it on the backs of the poorest in society.
But speaking at a press conference in Paris, the prime minister Sir Keir Starmer resisted the suggestion of future taxes without completely ruling them out.
He said: “We haven’t raised tax in the spring statement and I think in every press conference I did before yesterday the challenge to me was ‘you’re going to have to raise taxes in the spring statement, aren’t you?’ and I said ‘wait for the spring statement.’ We got the spring statement and we haven’t,”
He pointed out that Labour had promised not to raise income tax, VAT or employee national insurance contributions during the election and had not done so yet.
“We have kept good to those promises,” he added.
“Obviously I am not going to write future budgets every prime minister and chancellor has taken that position but if you look at the fact that we haven’t raised taxes that indicates the mindset we bring to this.”
The warning over a potential tax raid came as Donald Trump announced 20 per cent tariffs on cars exported into the US with the threat of more being imposed on Wednesday. The Office of Budget Responsibility has already warned that US tariffs could wipe out the £10bn headroom Ms Reeves had left herself in the spring statement.
And with doubts growing over Ms Reeves’ plans, former Tory chancellor Ken Clarke also suggested the chancellor would have to raise income tax or Value Added Tax (VAT) in October.
He told Times Radio he would have increased VAT on Wednesday, adding: “I think she’s got to go for value added tax or some levels of income tax in the autumn, probably VAT.”
The IFS also warned that new official data shows a dramatic decline in living standards over the last year.
In the 12 months to March last year, real average household income fell by 2 per cent, the think tank said, implying there had been no growth in incomes since 2016.
Ms Reeves denied there would be further tax rises or spending cuts at the Budget in the autumn, but stopped short of ruling them out entirely.
Asked if she would have to return with more cuts or tax rises, she said: “No.”
But pressed if this meant she could rule out these measures, she replied: “What I’m saying is that there are loads of things that this government are doing that are contributing to growth.”
Meanwhile, the backlash was growing against Ms Reeves’ decision to slash welfare as she disputed the government’s own impact assessment that it would put 250,000 more people in poverty including 50,000 children.
The Resolution Foundation claimed: “The combination of a weak economic outlook and benefit cuts that fall disproportionately on lower-income families means that living standards are on track to fall over the next five years for the poorest half of households by £500 on average, according to the Resolution Foundation’s overnight analysis of Spring Statement 2025.”
However, Ms Reeves told Sky News: “I am absolutely certain that our reforms, instead of pushing people into poverty, are going to get people into work.
“And we know that if you move from welfare into work, you are much less likely to be in poverty.
“That is our ambition, making people better off, not making people worse off, and also the welfare state will always be there for people who genuinely need it.”
Separate figures published on Thursday showed a new record high number of children living in poverty in the UK.
Data published by the Department for Work and Pensions showed 4.45 million children were estimated to be in households in relative low income, after housing costs, in the year to March 2024 – up from 4.33 million the previous year and the highest figure since comparable records for the UK began in 2002/03.
