Middle East war may force Rachel Reeves to raise taxes AGAIN despite warning burden is ALREADY hitting economy – as new report warns of impact on inflation and GDP

Pressure mounts on Rachel Reeves to boost taxes amid Middle East tensions

The escalating Middle East conflict has sparked fears that Chancellor Rachel Reeves may need to increase taxes once more, despite prior warnings that the current fiscal strain is already affecting economic performance.

Reeves has already added £75 billion annually in taxes to the UK’s finances, with the Spring Statement highlighting that this burden is nearing a historic peak. Much of this funding has been directed toward rising welfare expenses, as Labour MPs pushed for the removal of the two-child benefit cap, undermining earlier plans to reduce public spending.

The Office for Budget Responsibility (OBR) noted that the government’s fiscal stability hinges heavily on a surge in stock market revenues. A 35 per cent drop in these gains could add £26 billion to national debt, stripping Reeves of room to meet her primary economic goals.

Recent market volatility has been triggered by Donald Trump’s attacks on Iran, causing the FTSE 100 to lose a month’s worth of gains. Bloomberg Economics warns that prolonged Middle East unrest could drive up oil prices, leading to reduced GDP growth and higher inflation.

Long-term tax pressures loom large

OBR reports accompanying Reeves’ Spring Statement revealed that tax burdens were already projected to hit an unprecedented 38.5 per cent of GDP by 2030-31, surpassing the 38.3 per cent forecast from November.

The watchdog also highlighted the risk of freezing pension thresholds, which could push a million retirees into the tax net. This ‘stealth raid’ on retirement savings depends closely on inflation and wage trends, creating uncertainty for households.

“It’s very difficult to increase taxes faster than GDP – which is what’s needed really to bring the fiscal situation back under control – it’s difficult to do that without doing some damage to incentives to invest, work, save…”

David Miles of the OBR emphasized the potential harm of rapid tax hikes. He noted that the current approach risks diminishing the UK’s productive capacity, with negative ripple effects on employment and economic output.

The Institute for Fiscal Studies (IFS) reported that raising defense spending to 3.5 per cent of national income would require an additional £35 billion yearly, equivalent to the combined budgets of the Ministry of Justice and Home Office. This would necessitate VAT increases of 3 to 3.5 percentage points.

“The takeaway is that we should not expect the Government to be able to meaningfully increase what we spend on defence – if that’s what it decides it wants to do – without significantly cutting other Government programmes or raising taxes.”

Helen Miller of the IFS stated that the Middle East events and subsequent market shifts were the dominant economic stories on Wednesday, overshadowing the Spring Statement. She observed sharp rises in gas prices and borrowing costs, stressing the need for caution as these changes could persist.