Rachel Reeves faces mounting pressure to balance the books as economic growth slows and borrowing costs rise. A leading think tank has urged the Chancellor to raise taxes instead of implementing spending cuts, particularly in welfare, as she prepares to deliver her spring statement later this month.
Reeves is expected to update the country on her fiscal plans on 26 March, but with the economy faltering and government debt levels leaving her with minimal room for manoeuvre, she faces a difficult financial balancing act. The Resolution Foundation, in a report published on Monday, highlighted the need for the Chancellor to find around £4.4 billion to meet her fiscal rules, which require day-to-day spending to be covered by tax revenues rather than borrowing.
The think tank has warned that she faces two primary options: imposing deeper cuts on government departments or reducing support for disability and sickness benefits – a move that reports suggest she is seriously considering. However, the Resolution Foundation has strongly advised against cutting welfare, instead recommending that the Chancellor extend the current freeze on personal tax thresholds for an additional two years. According to their analysis, this would raise £8 billion, significantly more than the required amount, while also ensuring that the majority of the additional tax burden falls on the wealthiest households rather than those on low incomes.
Tough choices amid economic uncertainty
The UK economy has been struggling with weak growth and higher borrowing costs, making it harder for Reeves to meet her fiscal targets. The think tank’s report argues that attempting to balance the books by restricting welfare spending would disproportionately impact poorer households, while extending the tax threshold freeze would spread the burden more fairly.
Currently, personal tax thresholds have been frozen until 2028, meaning that as wages rise with inflation, more people will be dragged into higher tax brackets – a phenomenon known as fiscal drag. The Resolution Foundation notes that extending this freeze would not introduce a new tax but would generate significant revenue without immediate harm to living standards. They estimate that 80% of the additional tax revenue would come from the richest half of UK households, helping to ensure a more progressive approach to fiscal consolidation.
By contrast, raising the eligibility threshold for Personal Independence Payment (PIP) – the government’s main disability benefit – could save around £5 billion but would hit the poorest families the hardest. This would undermine efforts to support the most vulnerable and could exacerbate economic inequality.
James Smith, Research Director at the Resolution Foundation, emphasised the importance of making responsible fiscal decisions. He stated:
“The Chancellor must act decisively to meet her fiscal rules. But with the jobs market in recession territory, lower-income households shouldn’t bear the brunt of any consolidation.
Crucially, she should avoid turning the spring statement into a ‘sticking plaster’ budget, with long-term thinking on welfare reform undermined by the quest for short-term savings that could cause real harm.
And with Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future budgets even more challenging to deliver.”
Labour’s dilemma on taxation
The Labour government finds itself in a difficult position. During the general election, Prime Minister Sir Keir Starmer pledged to end what he termed “sticking plaster politics”, accusing previous governments of focusing too much on short-term fixes rather than addressing deep-rooted economic issues. However, Labour also promised not to raise taxes on “working people”, specifically ruling out increases in income tax, national insurance, or VAT.
Reeves reaffirmed this position in October last year when she announced that the tax threshold freeze, first introduced by the Conservative government in 2021, would end as scheduled in 2028. She justified the decision by arguing that extending it further would “hurt working people”, stating:
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“I am keeping every single promise on tax that I made in our manifesto.”
However, with financial pressures mounting, the government’s reluctance to introduce tax hikes could force it into difficult spending decisions. The think tank’s warning suggests that Reeves cannot rule out tax increases indefinitely, particularly if she wants to avoid making painful welfare cuts that would damage Labour’s reputation as a party committed to social justice.
What next for the spring statement?
As the 26 March deadline approaches, all eyes will be on Rachel Reeves to see how she chooses to balance the books. If she opts to cut disability and welfare benefits, she risks a backlash from progressive Labour MPs and the wider public. On the other hand, choosing to extend the tax threshold freeze may draw criticism from some businesses and higher earners but would ensure a fairer distribution of financial responsibility.
With Britain’s economy still recovering from high inflation, sluggish growth, and global uncertainty, Reeves must tread carefully. Whether she follows the Resolution Foundation’s advice or sticks to Labour’s existing tax commitments, her decisions will shape the government’s economic credibility in the years ahead.
