Rachel Reeves has increased taxes to record levels in a move that risks damaging economic growth and disincentivising people from earning more money, the government’s official forecaster has said.
The Office for Budget Responsibility (OBR) said that taxes would hit 38 per cent of national income in 2030-31, a postwar record. It said that the level of taxation could “distort or constrain economic activity by more than expected”.
The forecaster highlighted soaring tax revenues after the chancellor’s decisions to increase the employers’ rate of national insurance and freeze income tax thresholds. It said that revenues from the two taxes will rise from £480 billion in 2025-26 to £600 billion in 2030-31.
Iran
The publication of the forecast has been overshadowed by the escalating conflict in the Middle East.
Reeves said: “It is incumbent on me and on this government to chart a course through that uncertainty, to secure our economy against shocks and protect families from the turbulence that we see beyond our borders.”
The OBR said that the US airstrikes took place just as it was finalising its report, meaning it did not have time to assess the impact. It said that the conflict could have “very significant impact on the global and UK economies”.
David Miles, a member of the OBR’s budget responsibility committee, said predictions that inflation would fall had become “more uncertain” because of jumps in oil and gas prices. It means that many of the central forecasts may already be redundant.
Welfare
The government’s welfare bill — including spending on pensioners — is poised to soar, rising from £330 billion this year to £407 billion in 2030-31.
The OBR said that the number of people claiming disability benefits would rise from 6.5 million to 8.8 million, while the number claiming incapacity benefit will rise from 3.4 million to 4 million.
But the forecaster said that this could be an underestimate as it was assuming that new incapacity benefits claimants would rise at a slower pace than they had done in recent years.
Overall, welfare spending is predicted to cost the country 11.2 per cent of total GDP by 2030, up from the current 10.7 per cent.
The government was forced to abandon previous plans to reform welfare after a mass revolt by Labour MPs. It has yet to set out new plans.
Unemployment
Almost two million people will be jobless by the end of this year, surpassing the highs of unemployment last seen during the Covid pandemic.
The OBR said it expected unemployment to hit 5.3 per cent, up from 4.75 per cent last year and higher than its previous forecast in November.
It added that it then expected unemployment to gradually fall again from 2027, hitting a rate of 4.1 per cent by 2030.
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However, it warned that there was a chance that higher unemployment could become “structural and persistent”, with new technology such as artificial intelligence permanently displacing workers.
Even without this, the watchdog said new entrants into the labour force were “struggling to find work amid subdued hiring demand”.
Ruth Curtice, chief executive of the Resolution Foundation, warned that the prospect of higher unemployment was “particularly concerning” and urged Reeves to do more.
“The close to one million young people who are not in education, employment or training across Britain cannot afford to wait much longer for help,” she said.
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Growth
Economic growth remains stagnant and has been downgraded to 1.1 per cent for 2026, down from previous forecasts of 1.4 per cent.
The budget watchdog said the downgrade was linked to a growth slowdown late last year, with a weakening labour market and subdued data from business surveys.
However, the OBR also lifted its forecasts for growth in 2027 and 2028, with the economy to expand by 1.6 per cent in both years. Overall, its predictions for growth over the entire forecast period remained unchanged.
But Paul Dales, chief UK economist at Capital Economics, warned that this could be overoptimistic. “The conflict in the Middle East has changed the outlook, and the risks are that the leap in energy prices will mean UK inflation and interest rates are higher than the OBR is forecasting and real GDP growth will be lower,” he said.
Reeves’s fiscal headroom — her financial cushion — was estimated to have increased to £23.6 billion from £21.7 billion in the November budget, even after the cost of several government U-turns was taken into account.
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Migration
The OBR also lowered its forecast for net migration driven by more British nationals leaving the UK for a life abroad.
The watchdog said it was now expecting net migration to average 235,000 a year between 2026 and 2030, down from the 295,000 it was predicting back in November.
By 2030, this would reduce the adult population by about 200,000, compared with its November forecast. This would affect economic growth because it would result in a smaller working population paying less tax.
The OBR has yet to take into account new data showing a significant fall in the number of people coming to the UK from overseas on visas following crackdowns by successive governments.
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Public spending
Government spending on education, policing and transport will face real-terms cuts of over 4 per cent by the end of the decade, the OBR said in its analysis.
The watchdog said that expenditure on departments that were not “protected” would fall by 4.4 per cent a year under current government plans.
It said the overall spending would have to be £13.5 billion higher in 2030-31 for unprotected departments not to face budget cuts.
Reeves will not decide how much money individual government departments will get until the next spending review due in 2027.
However, ministers are facing growing pressures on budgets as a result of the need to spend more on the NHS and Sir Keir Starmer’s pledge to raise defence spending to 3.5 per cent of GDP by 2030.
Given the political pressure from Labour MPs on Starmer and Reeves to spend more on public services, many economists believe the current spending plans are unsustainable.
