Chancellor warns of uncertain outlook amid falling exports, rising borrowing costs, and public service squeezes
Chancellor Rachel Reeves is under mounting pressure after refusing to rule out future tax hikes in the wake of Britain’s worst monthly economic contraction in over a year. Official figures released on Thursday showed the UK economy shrank by 0.3% in April, driven by a sharp drop in exports, rising household bills, and business tax increases.
The surprise decline marks a setback for Reeves, who just a day earlier unveiled an ambitious Spending Review focused on long-term investment in infrastructure and public services. Although she pledged billions for the NHS and defence, other departmental budgets are facing cuts, leading economists to warn that the government may need to raise taxes again to balance its books.
Speaking to the BBC, Reeves acknowledged the figures were “clearly disappointing” and cautioned against premature certainty on the direction of tax policy. “No chancellor is able to write another four years of Budgets within a first year of government,” she said, citing ongoing global economic uncertainty. However, her refusal to explicitly rule out tax increases in the autumn Budget has intensified political debate around the sustainability of the government’s fiscal plans.
Official figures released on Thursday showed the UK economy shrank by 0.3% in April, driven by a sharp drop in exports, rising household bills, and business tax increases.
Economists argue the bleak economic data may leave the Treasury with few choices. Paul Johnson, director of the Institute for Fiscal Studies, warned: “With spending plans set, any move in the wrong direction will almost certainly spark more tax rises.” Ruth Curtice, chief executive of the Resolution Foundation, said the weaker outlook, combined with unfunded commitments such as changes to winter fuel payments, made higher taxes “likely” by the autumn.
While monthly GDP figures are often volatile, the more stable three-month measure to April showed the economy grew by 0.7%. Nonetheless, the latest data revealed worrying trends. The Office for National Statistics (ONS) reported a significant slump in the services sector, which includes retail, hospitality, and financial services — all of which faltered after a buoyant March that had been buoyed by property transactions completed ahead of a stamp duty change.
The downturn was further aggravated by a collapse in trade. Exports fell by £2.7 billion in April, with shipments to the US alone dropping by a record £2 billion. The collapse was largely attributed to the introduction of 25% tariffs on British cars exported to the US — a major blow given that vehicles are the UK’s largest export to the American market. Although a tariff relief deal has since been struck with Washington, the new terms have not yet come into effect. Until then, most British goods — including steel and automobiles — continue to face elevated duties upon entering the US.
Manufacturing was particularly weak, with car production slowing and broader industrial output stagnating. Business confidence has also been undermined by April’s increase in employer National Insurance contributions, from 13.8% to 15%, alongside a cut in the threshold at which firms begin paying the tax. Simultaneously, companies have had to absorb higher business rates and rising minimum wages.
Local councils are also facing mounting pressure as central government funding is tightened. Reeves has signalled that council tax is likely to increase to maintain vital local services — a move that could further squeeze household budgets already strained by cost-of-living pressures.
Opposition parties seized on the figures to criticise the chancellor’s strategy. Shadow Chancellor Mel Stride accused Reeves of “economic mismanagement” and said the Spending Review confirmed that “more taxes are coming.” Liberal Democrat Treasury spokesperson Daisy Cooper called the figures a “wake-up call” and urged the government to reconsider policies that are harming small businesses.
Despite the gloomy data, Reeves is sticking by her strategy to stimulate long-term growth through investment in large infrastructure projects, including new railway lines and the long-awaited Sizewell C nuclear power station. But critics argue that while such projects may bear fruit years down the line, the short-term outlook remains grim — with fragile growth, worsening trade conditions, and the ever-present spectre of higher taxes casting a shadow over Britain’s economic recovery.
