The influential Institute for Fiscal Studies (IFS) has warned Rachel Reeves that any more bad economic news will “almost certainly” spark more tax rises.
A day after the chancellor unveiled her spending plans for the rest of the parliament, the IFS added to concerns that she has left herself with little room for manoeuvre.
The warning came as the government was hit with the bad news that the economy had shrunk by 0.3 per cent, sparking fears of a potential recession.
Ms Reeves came into office with a pledge to grow the economy but it has been sluggish at best in her first year.
Paul Johnson, the outgoing director of the IFS, also noted in the post-spending review assessment that the council tax is set to rise at its fastest rate for 20 years as local government tries to close its funding gaps with annual increases of up to 5 per cent.
In a scathing assessment he suggested that the Treasury was at times “making up the numbers” and described Ms Reeves’ speech to the Commons on Wednesday as “baffling”.
But he said that the chancellor’s priorities were “reasonable” and conceded that she was dealing with difficult economic circumstances.
Mr Johnson also noted that the spending review did not represent austerity as some of Ms Reeves’ critics in the Labour Party have claimed.
There were also concerns that the cost of childcare promises will prove to be much more expensive than first estimated.
In his conclusions, Mr Johnson said: “If you were baffled by the Chancellor’s speech yesterday, so were we. It did not appear to be a serious effort to provide any useful information to anybody. I hope you find what we have to say somewhat more enlightening. To be fair to HM Treasury though the spending review document was a model of clarity.”
He went on: “The real test will be in how well the money is spent, and especially how effectively the capital spending is spent and managed. That’s the tough day-to-day business of government and, somewhat out of the spotlight of these big set piece events. It’s on that more than anything that the government will be judged.
But he warned: “Ms Reeves is now going to have all her fingers and all her toes crossed, hoping that the OBR will not be downgrading their forecasts in the Autumn. With spending plans set, and “ironclad” fiscal rules being met by gnat’s whisker, any move in the wrong direction will almost certainly spark more tax rises.”
The IFS also cast doubt on Labour’s much-vaunted defence spending aims, saying they would have expected higher increases going forward if Keir Starmer’s 3 per cent “ambition” was “concrete”.
And it said there was “uncertainty about how asylum costs will fall in reality” after Ms Reeves announced huge savings by ending the use of hotels, an aim that has defeated successive governments.