Will a tax raid tomorrow prove too tempting for Reeves?

Emergency Budgets are a bad idea, but with the economic changing fast Reeves may not have the luxury of waiting until Autumn to raise taxes, says Tim Sarson

Last autumn, after a long, long summer of speculation and rumour, our newly installed Chancellor of the exchequer Rachel Reeves delivered what she promised would be the first in a new annual series of Budgets. One autumn event each year, with the spring forecast seemingly relegated to more of a progress update than a Budget with a capital B.

It’s not the first time a Chancellor has promised this. The Treasury has longed to get back to a once-a-year cycle for ages. But it’s easier said than done. A year is a long time in economics. Indeed, since 20 January when the new US President was sworn in, a day can seem like a long time. So, it was a brave call.

But what happens when you promise no event at a time when people are used to an event? Especially just before the fiscal year end, when tax rates and thresholds traditionally get adjusted? You get speculation, and while we are not expecting one, the spectre of the famous “emergency Budget” looms.

Spoiled with fiscal events

We’ve been rather spoiled with fiscal events and emergency Budgets recently. This peaked back in 2022 when, lest we forget, we endured three fiscal events in three months. It’s been more sedate since then, but we still had two Budgets in 2023 and 2024.

Objectively speaking, emergency Budgets are a bad idea for many reasons. 

Constant tinkering with the rules increases volatility in tax policy and adds complexity to the system. That makes it harder for businesses to look ahead and plan, which they regularly tell us puts them off from committing to large investments. This is because businesses like stability.

Emergency Budgets also betray a lack of government confidence. How credible is any long-term economic plan if you keep changing it on a whim? They make the government ever more beholden to switches in wind direction on fiscal forecasts and GDP, which are, by their nature, unpredictable.

So, the logical course of action would be for the government to see through its promise and not touch tax this time, except for a few procedural measures like HMRC consultations. By all accounts they seem more focused on spending restraint rather than tax changes. 

But hang on. For several reasons, might some surprise measures this time be a temptation that’s hard to resist? A recognition that some rabbits out of the hat are needed but not a full emergency Budget.

I wouldn’t bet the house against a couple of surprises on the day

Let’s face it: the new American administration has handed Reeves several layers of pretext for a tax raid. A radically new US approach to NATO and the defence of Europe has seen European countries rush to commit to greater defence expenditures. In Germany’s case, they’re even attempting the impossible: to raise their constitutional debt ceiling. What better moment than now to do something ex-manifesto in the name of defence of the realm?

That same US administration has been busy creating new economic facts on the ground, too, as tariff barriers go up and stock markets go down. When the facts change so profoundly and so rapidly, a government has the perfect excuse to change its mind. Indeed, Britain may not have the luxury of waiting until this autumn to respond to several of the recent US retaliation threats over discriminatory tax measures. So perhaps Reeves can’t ignore tax this week after all?

Let’s see. My money is still on Wednesday being a quiet fiscal non-event. We’d surely have heard rumours and spotted a few flying kites by now. But I wouldn’t bet the house against a couple of surprises on the day.

Tim Sarson is head of tax policy at KPMG