Rachel Reeves cannot tax her way to growth

10 June 2025, 16:03 | Updated: 10 June 2025, 16:15

This Spending Review marks a significant increase in public spending – in a way that is neither wise nor defensible.

With the exception of a small number of areas such as the Defence budget, where the need to increase spending is widely recognised, much of this represents an unwillingness to take the hard decisions to control costs.

A significant proportion of the extra spending will not go on improving public services but rather on boosting the wages for public sector workers.

These increases will have to be paid for either through increased borrowing or higher taxes.

Both options would be a mistake.

Public borrowing and the national debt are already at historically high levels.

This is not free money and it has to be repaid now and by future generations.

Financing the National Debt is already one of the largest areas of Government expenditure, costing over £100 billion a year which is more than defence, education, and the criminal justice system.

Nor can the Chancellor count on raising taxes further.

The tax burden on households and businesses is already far too high and the Government already tried to fund its spending plans by increasing taxes such as Employers’ National Insurance Contributions– with damaging results.

The increase to Employers’ National Insurance was spun by the Treasury as a tax on businesses not on workers.

However, taxes that increase costs for businesses are passed on to workers in some form such as lower wages or fewer job opportunities.

We saw this just today with statistics from the ONS showing that both the number of jobs and the number of new roles being advertised are starting to decline – while the number of out-of-work benefits increase.

Given that the Government has rightly made getting more young people into work as one of its priorities, increasing taxes further is one of the worst things it could do.

Increasing taxes also destroys growth.

Again, as the Government has made growing the economy one of its main priorities, hiking up taxes would dampen growth even further and so undermine its ambition in this area while ensuring that living standards do not improve.

No Government can tax and borrow its way to growth.

The Government must change course – and face up to the growing share of expenditure being spent on out-of-work benefits as Policy Exchange set out in its report ‘For Whose Benefit?’, as well as pensions and public sector salaries, as well as on ballooning budget lines such as special educational needs and social care.

Borrowing is not free money and increasing taxes always brings negative consequences.

The only sustainable way to increase funding for essential public finances also is to grow the economy and get people back to work.

A year ago, the Government said that was its number one priority – it is past time to act on it.

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Ben Ramanauskas is a Senior Fellow in Economics at Policy Exchange

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