Rachel Reeves (Labour) acknowledged she was examining potential tax rises and spending cuts to address a significant budget shortfall. The Chancellor confirmed she was "looking at tax and spending" ahead of her November 26 Budget statement, with the shortfall partly attributed to Brexit's lingering economic impact.
The budget watchdog had "consistently overestimated" the UK's productivity, according to Reeves, with expected downgrades likely to complicate her fiscal planning further. Economists estimate the budget black hole at around £50 billion, driven by sluggish economic growth, persistent inflation, and mounting government debt costs.
Reeves told Sky News the economy continued suffering from Brexit, austerity policies, and Liz Truss's mini-budget effects. She said the Office for Budget Responsibility (OBR) summer review found "they have consistently overestimated our productivity performance."
Brexit's lasting damage
The Chancellor stated that "people thought that the UK economy would be 4% smaller because of Brexit." She described Brexit's impact as "severe and long lasting" despite government efforts to mitigate the damage through various agreements with the European Union.
The government had secured deals with the EU on food and farming, goods movement, energy trading, and an "ambitious youth mobility scheme" earlier this year. Reeves emphasised pursuing trade deals globally, particularly with the US, India, and most importantly the EU, to provide British exporters with worldwide market access.
The National Institute of Economic and Social Research (Niesr) suggested Reeves would need to find approximately £50 billion annually by 2029-30. This would meet her goal of balancing day-to-day spending with tax revenues while maintaining £10 billion "headroom" against that target.
Addressing fiscal challenges
When asked about being trapped in a "doom loop" of constant tax increases, Reeves said she wouldn't use those terms but "nobody wants that cycle to end more than I do." She acknowledged facing multiple challenges including geopolitical uncertainties, global conflicts, and increased trade barriers.
Reeves emphasised fiscal responsibility, stating: "The numbers will always add up with me as Chancellor because we saw just three years ago what happens when a government, where the Conservatives, lost control of the public finances - inflation and interest rates went through the roof."
She identified planning system reforms as crucial to "get back to building in Britain." Reeves argued that Britain had been "in the slow lane of economic growth" due to project delays, warning that always saying "no" to big investments would perpetuate poor growth and stagnant living standards.
International outlook
Reeves spoke before departing for the International Monetary Fund (IMF) meeting in the United States. The IMF warned that UK inflation would surge to the highest level among G7 developed democracies in 2025 and 2026.
The IMF increased its UK economic growth forecast for this year but reduced its 2026 assessment amid labour market concerns. Britain was set to be the second fastest growing G7 country this year, with only the US growing faster, according to the IMF.
Sources used: "Sky News", "Office for Budget Responsibility", "National Institute of Economic and Social Research", "International Monetary Fund"
Note: This article has been edited with the help of Artificial Intelligence.
