Rachel Reeves warned tax rises could damage growth as economy flatlines

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Rachel Reeves has received a caution that anticipated tax increases in the upcoming October Budget might hinder economic growth, following unexpected recent data that revealed the economy is stagnating.

Economists have warned that more hardship may be on the horizon due to the chancellor's choices and increased energy costs this winter.

In May, the main economist at the Office for National Statistics (ONS) characterized the economy as thriving tremendously.

However, the most recent data surprisingly revealed that growth has come to a halt for the second consecutive month. According to the Office for National Statistics (ONS), the gross domestic product (GDP) experienced no growth in July.

In reply, the chancellor stated, "I fully understand the magnitude of the challenges ahead, and I want to be truthful with the British public—change won't come quickly." She also criticized the "14 years of inertia" during Conservative rule.

She also justified her government's tough choices, including cutting winter fuel payments for nearly 10 million seniors, arguing that recent statistics showed why those decisions were essential.

She expressed that these were not choices she wished to make or anticipated having to make. However, given the situation we were dealing with, it was essential to ensure that our public finances were stabilised.

“By taking these actions, we can restore stability to our economy and begin to promote growth.”

During the summer, Ms. Reeves cautioned that taxes would need to increase in the Budget to address a £22 billion deficit in the public finances caused by the Conservatives.

The chancellor did not dismiss the possibility of increasing capital gains tax and inheritance tax, as well as considering changes to pension regulations, to address the budget shortfall.

She prepared everyone for a challenging financial report by stating, "I believe we'll need to raise taxes in the budget."

Families will see increased energy costs this winter due to the regulator's decision to raise the price limit by 10 percent.

Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, has cautioned that economic growth might decelerate in the near future. He suggests that increasing energy costs and anticipated tax increases could lead to a new wave of cautious spending and investment behavior.

Leading economists have cautioned that additional reductions in spending might exacerbate the challenges confronting the UK economy. Max Mosley, a senior economist at the National Institute of Economic and Social Research (NIESR), informed The Independent that the stagnant GDP growth can be attributed to "years of insufficient investment and sluggish productivity improvement."

He stated, "Making large and courageous investments now is essential to prevent further disappointing GDP figures down the line."

"Today's stagnant GDP figures are underwhelming, but we need to be cautious about overreacting to the fluctuating monthly indicators of economic activity."

Simon Pittaway, a senior economist at the Resolution Foundation, noted that following a solid beginning to the year, economic growth stalled in June and July, mainly due to declines in manufacturing and construction. The economy managed to avoid a downturn during the early summer months, thanks largely to the durability of the services sector in Britain.

What’s more troubling is that any growth we've experienced this year has been 'unproductive,' meaning it’s coming from longer working hours instead of increased output per hour. In fact, productivity dropped by 0.5 percentage points in the three months leading up to July. Addressing this issue is the most significant economic challenge facing Britain right now.

Liz McKeown, the director of economic statistics at ONS, stated that the economy experienced no growth for the second consecutive month. However, the sustained performance of the services sector contributed to overall growth when looking at the past three months.

In July, the increase in services was primarily driven by computer programmers and the healthcare sector, both of which bounced back from strikes that occurred in June. However, this growth was somewhat balanced out by declines in the advertising industry, as well as among architects and engineers.

Overall, manufacturing experienced a decline, with car and machinery companies facing a particularly tough month. Additionally, the construction sector also saw a decrease.

The economy experienced a growth of 0.6% from April to June, indicating that it might have bounced back after entering a technical recession, which happens when there are two consecutive quarters of negative growth.