Reeves’s tax raid ‘to damage growth’

Rachel Reeves’s stealth tax raid will damage growth next year, economists have warned, as households cut back on spending.

The Chancellor’s decision to extend a freeze on tax thresholds will lead to economic growth slowing to just 1pc in 2026, according to KPMG, down from previous forecasts of 1.1pc before last week’s Budget.

The downgrade will pile more pressure on Ms Reeves following the chaotic handling of her Budget, with the Chancellor accused of misleading the public over the country’s finances to justify a £30bn tax raid.

In its latest economic outlook, KPMG said the economy will slow significantly after reporting growth of 1.4pc for 2025. After falling to 1pc next year, GDP growth will then bounce back to 1.4pc in 2027.

Wage growth is also expected to fall towards 3pc by the middle of next year, KPMG said, while unemployment will hit a five-year high of 5.2pc. It is currently at 4.8pc.

The darkening outlook comes after the Chancellor used her Budget to raise taxes and increase welfare spending, piling further strain on hard-up households.

While Ms Reeves insists she stuck to her manifesto promise not to raise National Insurance, VAT or income tax, she has been criticised for freezing tax thresholds for an additional three years beyond 2028.

The decision will lead to an additional 4.8 million people paying the higher 40pc income tax rate and 600,000 more paying the additional rate – a phenomenon known as fiscal drag.

Economists have warned that the tax raid will hit household spending, as it will increase costs for families already battling a tough jobs market and a wider economic slowdown.

Yael Selfin, chief economist at KPMG UK, said: “With ongoing headwinds continuing to weigh on household activity, consumer spending is likely to remain subdued over the coming year.

“Although the autumn Budget avoided front-loaded tax hikes, the decision to maintain frozen tax thresholds until 2031 means that fiscal drag will persist.”

It comes after the Office for Budget Responsibility (OBR) also downgraded its growth forecasts for 2026, from 1.9pc to 1.4pc.

The Budget watchdog predicted that growth in real disposable incomes is on track to be the second-worst since records began in the 1950s.

The Government is under fierce scrutiny over its handling of the Budget after it emerged Ms Reeves was aware there was no shortfall in the public finances but pushed ahead with her £30bn tax raid regardless.

The Chancellor insisted on Sunday that she did not lie to voters, although Reform and the Conservatives are calling for an inquiry into whether she broke the ministerial code.

Meanwhile, a separate analysis has also found that confidence among UK business leaders fell last week after Labour’s tax rises dampened growth hopes.

The latest poll by the Institute of Directors (IoD) found that business leaders’ confidence in their own company plunged to -20 immediately after the Budget, down from zero in October. This was the second-lowest monthly reading on record.

Confidence has only ever been lower in April 2020, when Britain was reeling from the pandemic and lockdown restrictions.

The IoD said that bosses’ expectations for revenue growth, hiring and investment have all fallen.

The survey showed that confidence was also subdued in the run-up to the Budget amid chaotic speculation over potential tax rises.

Anna Leach, IoD chief economist, said: “The message from this Budget is that work remains to be done to lift the UK’s growth prospects.

“The biggest opportunities remain in planning reform, a serious programme of deregulation and public sector efficiency. But the immediate outlook for business investment and employment has weakened further, and that will require further attention.”

Another survey by the Confederation of British Industry (CBI) revealed a similar drop in activity across the UK services sector in the three months to November.

Business activity fell sharply across both consumer and professional services, marking more than a year of decline.

The average price of goods sold also remained flat despite rising costs, delivering a further blow to companies.

It marks the first time that selling prices have not grown since the first half of 2021.

The CBI warned that business activity was expected to fall again over the coming months.

Charlotte Dendy at the CBI said: “Last week’s Budget will add further costs to businesses, while also hampering business investment and profitability.

“The Government must now leverage enterprise expertise to unlock economic growth.”

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