Rachel Reeves acknowledged she was looking at potential tax rises and spending cuts to fill a black hole in her Budget which she said was partly due to the lingering impact of Brexit.
The Chancellor said “of course, we’re looking at tax and spending” as she prepares for her November 26 statement.
She confirmed the budget watchdog had “consistently overestimated” the UK’s productivity, with the expected downgrade of its previous assumptions likely to make Ms Reeves’ task even harder.
With no boom in economic growth, stubbornly high inflation and the mounting costs of government debt, Ms Reeves will have to fill a black hole estimated at around £50 billion by some economists.
Ms Reeves told Sky News the economy was still suffering from the impacts of leaving the European Union, austerity policies and Liz Truss’s mini-budget.
She said the Office for Budget Responsibility (OBR) had carried out a review over the summer and found “they have consistently overestimated our productivity performance”.
It was up to them to set out the reasons, she said, but “austerity, Brexit, and the ongoing impact of Liz Truss’s mini-budget, all of those things have weighed heavily on the UK economy”.
“Already, people thought that the UK economy would be 4% smaller because of Brexit,” she said.
“Now, of course, we are undoing some of that damage by the deal that we did with the EU earlier this year on food and farming, goods moving between us and the continent, on energy and electricity trading, on an ambitious youth mobility scheme.
“But there is no doubting that the impact of Brexit is severe and long lasting and that’s why we are trying to do trade deals around the world, US, India, but most importantly with the EU so that our exporters here in Britain have a chance to sell things made here all around the world.”
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The National Institute of Economic and Social Research (Niesr) has suggested Ms Reeves will need to find around £50 billion a year by 2029-39 to meet her goal of balancing day-to-day spending with tax revenues while maintaining “headroom” of around £10 billion against that target.
Asked if she was now in a “doom loop” of having to constantly hike taxes to fill a black hole, Ms Reeves said she would not use those words but “nobody wants that cycle to end more than I do”.
She said: “Challenges are being thrown our way, whether that is the geopolitical uncertainties, the conflicts around the world, the increased tariffs and barriers to trade and now this review looking at how productive our economy has been in the past and then projecting that forward.
“But I won’t duck those challenges. Of course, we’re looking at tax and spending as well, but 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 said reforms to the planning system would help “get back to building in Britain”.
“For too long we’ve been in the slow lane of economic growth because we haven’t signed off projects and if the answer to big investments in Britain is always ‘no’, we’re going to carry on getting the same results in terms of poor growth and the lack of improvement in living standards,” she said.
Ms Reeves was speaking to Sky News before heading to the United States for the International Monetary Fund (IMF) meeting.
The IMF warned UK inflation is set to surge to the highest in the G7 group of developed democracies in 2025 and 2026.
The IMF increased its UK economic growth forecast for this year but reduced its assessment for 2026 amid concerns over the labour market.
Britain is set to be the second fastest growing G7 country this year, the IMF also said, with only the US growing faster.
Shadow chancellor Sir Mel Stride said: “Rachel Reeves doesn’t need to raise taxes. She needs to get a grip of Government spending – including the welfare bill.
“Be in no doubt, this tax doom loop is down to the Chancellor’s economic mismanagement.
“Under Rachel Reeves we have seen inflation double, debt balloon, borrowing costs at a 27-year high, and taxes up – with more pain on the way in the autumn.”
