Budget situation is ‘desperate’, Reeves warned as experts say she has no choice but to raise big taxes

Rachel Reeves has been warned by some of the country’s leading economists that she has no choice but to raise major taxes and reform others at the Budget if she is to turn Britain’s “desperate” economic situation around.

The chancellor is facing a black hole of up to £50bn in the government’s finances and is widely expected to hike levies next month, but she has been warned she cannot afford to tinker at the margins “by picking from a Scrabble bag” of smaller tax increases.

Leading tax expert Dan Neidle, the founder of Tax Policy Associates, said the “wise” way for Ms Reeves to increase taxes would be “raising one of the main taxes, possibly by expanding the base of VAT, which may or may not break a manifesto pledge”.

He warned that the “less wise way to do it is by picking from a Scrabble bag of lots of little tax rises”.

Economists have repeatedly warned Ms Reeves in recent months that a combination of Labour U-turns, higher borrowing and sluggish economic growth means she must raise taxes or tear up her flagship borrowing rules.

But last month she suffered another blow with the official Budget watchdog set to downgrade a key economic performance indicator, in a move that could also drive tax hikes.

Mr Neidle also called for reform to the tax system to make it more pro-growth, warning the situation had become “quite desperate”.

He pointed to a cliff edge of £90,000 at which small businesses pay VAT, which he warned was preventing many from expanding because they would be hit with an immediate penalty if they grew and made more money.

The call came just hours after Ms Reeves received more dire economic news as unemployment hit its highest level for more than four years.

The jobless rate increased unexpectedly to 4.8 per cent in the three months to August, up from 4.7 per cent in the previous three months, the Office for National Statistics said, the highest since March to January 2021, at the height of the pandemic.

Commenting on the rising employment rate, shadow business secretary Andrew Griffith said: “Rising unemployment is a disaster for the economy and a tragedy for affected families. The growing crisis of young people not being able to find work is a prime example of Labour taking our country in the wrong direction.

“It beggars believe that the government are making things worse with their ‘back to the seventies’ employment legislation which every single business group opposes.”