Families should brace themselves for a ‘tax bomb’ this autumn, the Conservatives warned on Wednesday.
The cash will be needed to plug the multi-billion pound black hole in the public finances caused by Labour’s welfare U-turn.
As a senior government minister failed to rule out tax increases, economists, investors and MPs lined up to say the Treasury had no other option.
Pat McFadden, the Cabinet Office Minister, said there would ‘definitely’ be a ‘financial consequence’ to the £5billion welfare retreat.
On Tuesday, the Government abandoned its flagship plan to cut disability benefits following a furious backlash from MPs.
But Mr McFadden made plain the move would have consequences, telling the BBC yesterday: ‘You can’t spend the same money twice, so more money spent on that means less for some other purpose.’
Allies of the Chancellor have said she will not be able to afford to scrap the two-child benefit cap – a key demand of scores of Labour MPs – as a result of the climbdown.
Campaigners say scrapping the cap would lift 350,000 children out of poverty, but it would cost around £2.5billion a year.
Families should brace themselves for a ‘tax bomb’ this autumn, the Conservatives warned on Wednesday after changes were revealed by Prime Minister Keir Starmer (pictured)
Tory leader Kemi Badenoch (pictured) asked Sir Keir to reassure ‘frightened’ people by ‘ruling out tax rises in the autumn budget’ which he refused to do
In March, the OBR said Ms Reeves had just under £10billion of headroom to meet her fiscal rules. But she has now blown £5billion in the welfare climbdown and £1billion to the winter fuel payment U-turn, leaving her with virtually no headroom if she also scraps the two-child benefit cap.
Shadow Chancellor Mel Stride told the Mail on Wednesday night: ‘Labour’s welfare shambles has left the country facing a ticking tax timebomb.
‘Businesses and hardworking families should brace themselves for further painful tax hikes as Rachel Reeves scrambles to plug the gaping hole left by this weak Prime Minister’s economic mismanagement.
‘This week’s chaos exposes Labour’s inability to govern – pushing us towards higher taxes and a spiralling debt crisis. It doesn’t have to be this way.’
Sir Keir Starmer failed to rule out tax rises in the autumn during Prime Minister’s Questions on Tuesday.
Tory leader Kemi Badenoch asked him to reassure ‘frightened’ people by ‘ruling out tax rises in the autumn budget’.
But he replied: ‘She knows no Prime Minister or Chancellor ever stands at the despatch box and writes budgets in the future. That isn’t what they did, and it isn’t what we do.’
The Institute for Fiscal Studies also warned that tax rises were looking ‘increasingly likely’.
Gordon Shannon, a fund manager at TwentyFour Asset Management, told the Financial Times: ‘Having boxed themselves in early with a lack of headroom to the fiscal rules, it was almost inevitable the walls would close in at some point.
‘Gilt investors wanted to see spending cuts… Now the Government’s only exit is tax rises, risking a death spiral of growth destruction.’
