Rachel Reeves 'could be forced into £40bn extra tax hikes' after benefits disaster

Rachel Reeves could be forced to hike taxes by £40 billion after a string of U-turns and concessions swallowed her financial headroom. Following pressure from Labour backbenchers, the Government was forced into a humiliating capitulation on its plans to save £5 billion on welfare payments.

Coming just a month after the Government was forced to U-turn on winter fuel payments, a measure that could see public spending increase to higher levels than before the original measure, the Government could be left with no option but to generate revenue through taxes. Ben Zaranko of the Institute for Fiscal Studies, believes that the Chancellor could be left with no choice but to raise taxes on a "similar scale" to the £40bn of hikes introduced in October's budget. He said: "It's not hard to imagine a world where they are of a ballpark similar scale to last autumn.

"If you have the perfect storm of economic forecasts being downgraded, additional spending commitments because these reforms haven't got through parliament, and the world is in a gloomier place generally, you could comfortably be into double figures billions even before you talk about any retail offers.

"A £20, £30, £40-billion budget is not what the government would want but it's not impossible by any means."

Analysis by Deutsche Bank shows that the Treasury will need to raise as much as £32 billion as it faces a forced increase to defence spending, a precarious relationship with the United States and volatile market conditions which influence the cost of borrowing.

The bank said in a note: "We continue to see £10-15billion in tax hikes announced as part of the forthcoming Budget.

"But this should now be seen as the floor for tax hikes in the autumn. The risk is that Chancellor Reeves needs to dig deeper to deliver even more."

The bank believes that if the current market conditions remain in the Autumn, the Chancellor could be left with little option than to break Labour manifesto pledges by hiking income tax, VAT or national insurance contributions once more.

Other measures to generate income could come in the form of a freeze on income tax thresholds, council tax reforms and changes to pension tax reliefs.