Chancellor Rachel Reeves faces a £20bn black hole in the public finances as Britain’s economy struggles with weak growth and soaring borrowing costs, JP Morgan has warned.
The investment bank’s economists warned that slower economic growth and high interest rates will reduce the government’s ability to spend or invest freely.
Allan Monks, an economist at JP Morgan said: “Higher borrowing costs are just the tip of the iceberg, and weak growth is instead the main concern.”
The warning comes as Britain’s economic performance continues to lag behind major competitors, particularly the United States.
Analysts suggest the Chancellor may need to consider an emergency Budget in March to address the growing fiscal challenge through potential tax rises or spending cuts.
The shortfall threatens to derail Labour’s economic plans just months after taking office.
The IMF’s forecast is lower than the UK’s previous projections, which could put more pressure on the country’s finances
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The International Monetary Fund’s latest economic health check shows the UK is projected to grow by just 1.6 per cent this year and 1.5 per cent in 2026. In contrast, the US is expected to grow by 2.7 per cent this year and 2.1 per cent in 2026.
This difference comes as Donald Trump returns to the White House, and his low-tax, low-regulation policies seem to be helping the US economy.
The IMF’s forecast is lower than the UK’s previous projections, which could put more pressure on the country’s finances.
The UK’s recent economic performance has also been disappointing, with growth last year at just 0.9 per cent. This weak growth makes it harder for the Labour Party to meet its goal of making the UK the fastest-growing country in the G7.
JP Morgan’s analysis points directly to recent tax increases as a key factor in dampening economic growth prospects.
Monks said: “Growth prospects have deteriorated in part due to tax hikes at the last Budget.”
The record £40bn of tax increases has severely impacted economic growth, potentially knocking the Chancellor’s finances off target by between £17bn and £35bn.
This assessment depends on the extent of the anticipated Office for Budget Responsibility downgrade.
The bank’s economists suggest Reeves’s National Insurance raid has particularly damaged business confidence.
The deteriorating growth outlook is expected to result in lower tax revenues and increased borrowing, creating a compounding effect on public finances.
These factors are contributing to a projected £20 billion shortfall in government finances, according to JP Morgan, which needs urgent action.
The problem comes from the rapid loss of the £9.9 billion buffer the Chancellor had set up in October.
This buffer was part of a plan by Reeves to make sure borrowing would only be used for investment within five years, while everyday spending would be covered by taxes.
Monks explained that due to current market conditions and higher debt interest costs, this safety net has been wiped out. The situation is worsened by poor economic performance.
To fix the gap and return to the original financial plan, the Government may need to make £20bn in spending cuts or raise taxes.
To fix the gap and return to the original financial plan, the Government may need to make £20bn in spending cuts or raise taxes
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Monks warned: “It would appear that all the existing headroom around the fiscal rules is set to evaporate, but also with a net shortfall opening up.
“The Chancellor will want to avoid significant tax increases and near term spending cuts.”
Instead, the most likely approach could be to “commit to ill-defined future spending cuts and then hope they won’t need to be delivered,” according to the bank’s analysis.
However, JP Morgan warns this strategy could face credibility challenges. But the intention would be to buy time ahead of a full Budget.
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