Chancellor Rachel Reeves faces launching a tax raid on millions of Britons as it is only "lever" left at the Treasury's disposal to bolster the economy, the Institute of Fiscal Studies (IFS) has warned.
Reeves was visibly tearful in the Commons today as her position came under intense scrutiny following a welfare U-turn that has created an almost £5billion black hole in her budget plans.
The Chancellor's emotional appearance came after the government abandoned changes to restrict eligibility for Personal Independence Payment (PIP) just 90 minutes before MPs voted on them.
This wiped out savings Reeves had counted on to meet her goal of funding day-to-day spending through tax receipts rather than borrowing.
The Chancellor may be forced to raise taxes, economists have warned
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Downing Street insisted Reeves is "going nowhere" and has Prime Minister Keir Starmer's "full backing", whilst allies said she was dealing with a "personal matter".
Paul Johnson, chief executive of the IFS, said: "The immediate fiscal consequence of this week's climbdown by the government is that spending, and hence borrowing, will be at least £5billion more in 2029 than was planned.
"Add another billion and a half or so from the reverse ferret on pensioner fuel payments, and most of the 'headroom' against the chancellor's main fiscal rule is gone."
Johnson warned that Winter Fuel Payments represent about one per cent of what the government pays pensioners and "make little sense as part of the wider pension system".
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Paul Johnson has shared his concerns for the UK economy
GB NEWSHe said: "If the Government can't cut either of these, it is not going to be able to cut anything from the welfare or pensions bills. And spending on public services for the next few years was set at the spending review. That is not going to be revised down."
The IFS chief executive warned that chancellors should have three levers to manage the nation's finances - tax, spend and borrow - but Reeves effectively has only one option remaining.
"This Chancellor does not have three levers. There is no scope for more borrowing and, it seems, none for less spending. That leaves tax," the economist said.
He expressed surprise that Labour ministers have been doubling down on promises not to increase taxes on "working people", given the fiscal constraints.
Johnson warned: "Rachel Reeves is now desperately dependent on the next set of economic and fiscal forecasts from an OBR that has just reported on how over-optimistic it has been in recent years. My goodness, this autumn's budget could be hard."
The IFS's incoming director, Helen Miller, warned that with departmental spending plans now effectively locked in and the government having rowed back on planned cuts to pensioner and working-age benefits, tax rises would look increasingly likely.
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Recent tax changes have proven to be controversial PAThe Prime Minister faced questions over his handling of the welfare reform package, which has been stripped of key elements to limit the scale of a Labour revolt.
Conservative Party leader Kemi Badenoch said Reeves looked "absolutely miserable" and challenged the Prime Minister to say whether she would keep her job until the next election.
Starmer dodged the question about whether Reeves would be in place for the remainder of the Parliament, laughing as he said Mrs Badenoch "certainly won't".
Badenoch said: "Today the Prime Minister refused to back his Chancellor, leaving her humiliated. She is the human shield for his expensive U-turns."
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