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Rachel Reeves should tax the rich but avoid hitting the living standards of lower income families, says Resolution Foundation

The Resolution Foundation has called on chancellor Rachel Reeves to raise taxes and "act decisively to meet her fiscal rules" ahead of this month's spring statement.

It said higher interest rates, weaker growth and lower tax revenues mean that fresh fiscal tightening is likely to be needed when Reeves delivers her speech to the House of Commons on 26 March.

The group, however, warned that she must avoid hitting the living standards of lower income families in the process, given that the jobs market is already in recession territory.

"Extending the freeze in personal tax thresholds by a further two years to 2029-30 would raise around £8bn," the Foundation said. "Crucially, this would not affect living standards in the short term as the policy wouldn’t take effect until April 2028, while 80% of extra revenue would come from families in the richest half of the income distribution."

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It added: "Less than five months on from the chancellor’s autumn budget, the UK’s economic outlook has deteriorated markedly.

GDP is now expected to be around 1.2% lower, CPI inflation 0.4 percentage points higher, and interest rates expectations 0.4 percentage points higher than the OBR forecast at the time of the autumn budget.

In addition to this, the Foundation’s employment estimate, which uses population figures from the Office for National Statistics and HMRC payroll data, suggests the number of people in work is falling at a pace consistent with a recession.

It estimates that this deterioration would lead the Office for Budget Responsibility (OBR) to revise down its projection for the current account balance from a surplus of £9.9bn in 2029-30 to a deficit of around £4.4bn. This means that without fresh policy action the chancellor would be breaking her newly-legislated fiscal rules.

One option is for the finance minister to trim the spending envelope ahead of the spending review, the analysis found. Reducing the annual real increase from 2026-27 to 2029-30 from 1.3 to 1.2% would save £3bn in 2029-30.

But it warned that with ‘unprotected’ departments already facing cuts of around £9.7bn after next year, reductions risk further damaging front line services such as social care, the justice system and policing that are already under strain.

James Smith, research director at the Resolution Foundation, said: “The UK’s economic outlook has declined markedly since the Budget last Autumn. Weaker growth and higher interest rate expectations look set to turn the UK’s projected current surplus of £10bninto a deficit of around £5bn.

“The chancellor must act decisively to meet her fiscal rules. But with the jobs market in recession territory, lower income households shouldn’t bear the brunt of any consolidation.

“Crucially, she should avoid turning the spring statement into a ‘sticking plaster’ Budget, with long-term thinking on welfare reform undermined by the quest for short-term savings that could cause real harm.

“And with Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future Budgets even more challenging to deliver.”