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In the upcoming Budget, the chancellor is being urged to take decisive action or face the prospect of future spending cuts and tax hikes, according to a report by the Institute for Fiscal Studies (IFS). The IFS has projected that a staggering £22bn needs to be found by Rachel Reeves to address a shortfall in the government’s finances, potentially necessitating tax increases. Maintaining the current £10bn headroom in the system is possible with this amount, but the IFS argues there is a strong rationale in seeking to extend this buffer even further.
Helen Miller, director at the IFS, expressed concern over the lack of a substantial financial buffer, warning of potential instability that could result in the chancellor struggling to keep up with changes in forecasts. She emphasized the importance of avoiding a recurring cycle of budgetary challenges, attributing the current predicament in part to the chancellor’s decision to operate with minimal headroom. Factors such as rising borrowing costs, subdued growth forecasts, and increased spending commitments in recent months have contributed to the government’s constrained position.
Reeves must address the financial shortfall in order to adhere to her self-imposed fiscal rules, which she has deemed non-negotiable. The IFS highlighted the importance of shifting the focus away from constant scrutiny of headroom towards more substantive discussions on enhancing economic growth and tax system reform. With indications that taxes may be raised in the forthcoming Budget, the chancellor faces tough decisions as she navigates the challenging economic landscape. The IFS’s green budget outlines the impending choices that the government will need to make, supported by the Nuffield Foundation and Barclays
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