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Politics latest: 'Sting in the tail' in chancellor's spending plans revealed

Rachel Reeves told Sky News her spending plans are "fully funded", but the Tories and Institute for Fiscal Studies have tax rises are almost inevitable.

Why you can trust Sky News

The Politics Hub is today dominated by the fallout from the chancellor's spending review yesterday, which set out the government's budgets and priorities for the coming years.

Here are the main things you need to know:

  • The Institute for Fiscal Studies has warned Rachel Reeves is a "gnat's whisker" away from having to raise taxes in the autumn budget;
  • The economic thinktank said the "sting in the tail" in the chancellor's plans is they assume council tax will go up by the maximum amount across the UK, but there could yet be more to come;
  • Rachel Reeves insisted to Sky News her plans are "fully funded" by her previous budget and spring statement:
  • The chancellor's day didn't get off to the best of starts, as new economic growth figures cast a shadow over her spending review;
  • They should the economy shrank by 0.3% in April, more than expected, although this was largely driven by uncertainty over Donald Trump's tariffs;
  • Nonetheless, economics and business correspondent Gurpreet Narwan said the figures showed the economy was stuck in a "painful feedback loop".

That's all for now - stay with us for more updates and analysis this afternoon and into the evening.

Chancellor 'must rule out any more tax rises', demand Lib Dems

We've heard a lot of reaction to the chancellor's spending review this morning, with warnings Rachel Reeves may need to raise taxes.

She told Sky News the spending review is "fully funded", but declined to say whether there would be tax rises in future. 

For what it's worth, the IFS said the spending review is based on the idea all councils in England will hike council tax by 5% for each year covered. 

Watch: Reeves refuses to rule out further tax rises this morning

Now, the Liberal Democrats have called on Reeves to promise there won't be any more tax rises. (Hint: she won't.)

Sarah Olney, the party's business spokesperson, said: "She must choose to put growth first and rule out any more tax rises for families and small businesses.

"Britain must go for growth through a bespoke new trade deal with the EU.

"If anyone should be asked to pay more tax, it should be the big banks, social media giants and online gambling firms who have been raking in record profits while ordinary families struggle to make ends meet."

Tory leader says 'no one is making the argument for business' except her

Kemi Badenoch has said the chancellor "talked a good game" in her spending review, but that the government's "actions tell a completely different story".

The leader of the Conservatives is speaking at the Peel Hunt FTSE250+ conference.

She says the "economy is stuck in first gear" and that "London has suffered the greatest exodus of wealthy people of any city in the world, except Moscow", since Labour come to power.

Badenoch says: "We forgot business is a good in and of itself - and that it pays for everything, it is a source of our prosperity".

But she warns the UK is in a "crisis" because many people instead think business just "hoards wealth and is greedy".

Badenoch says "no one is making the argument for business any more, except me and my party".

Tories have a 'serious centre-right plan', says Badenoch

She also warns that the crisis is not only of numbers, but of "spirit" with too many in government believing growth comes from regulators.

She claims borrowing is also now too high, with a "significant risk of a death spiral".

Badenoch says her party will offer a "serious centre-right plan" that "understands the power of the private sector".

Badenoch says another Tory government would reverse changes to agricultural property relief (APR) and business property relief (BPR), and would remove the VAT Labour introduced on private school fees.

She adds that they would "slash pointless regulation", reduce spending, and reform the welfare system.

"We will cut taxes, but we will do it responsibly," she adds.

Speaker says 'prayers and thoughts' with passengers on Air India plane crash

The Speaker of the Commons has said his "thoughts and prayers" are with those involved in a plane crash in India.

The flight, bound for London Gatwick, was carrying at least 242 people and crashed almost immediately after take-off this morning. 

Sir Lindsay Hoyle said: "All our prayers and thoughts do go to the families of that London bound aircraft that's crashed - let's hope there is better news to come on that."

53 of those on board the flight, from Ahmedabad, are British nationals, according to Air India. 

PM being kept updated

The prime minister has also commented, saying the scenes coming out of Ahmedabad "are devastating".

"I am being kept updated as the situation develops, and my thoughts are with the passengers and their families at this deeply distressing time."

The foreign secretary has said he is "deeply saddened by the news" and his thoughts "are with all those affected".

David Lammy added: "The UK is working with local authorities in India to urgently establish the facts and provide support."

Spending review assumes all councils will hike taxes by 5%, warns IFS

Paul Johnson now warns the chancellor's spending review has a "sting in the tail" - which is that it relies on all English councils raising tax by 5% every year.

This would lead to bills rising at their "fastest rate over any parliament since 2001-05", he says.

The Institute for Fiscal Studies director explains: "Local government in England did perhaps a little better than it might have expected 鈥� it has so often been at the back of the queue. 

"Its core 'spending power' is set to rise by 2.6% a year from next year."

The "sting in the tail", he says, is that figure assumes people's council tax bills will rise by the maximum amount of 5% (something the chancellor was asked about yesterday, watch below).

'Council tax needs reform'

Johnson adds: "Indeed, if English councils do choose 5% increases 鈥� and most are likely to 鈥� bills look set to rise at their fastest rate over any parliament since 2001-05. 

"That might not be so bad if it weren鈥檛 for the fact that those bills are based on property values in 1991, and that the system is regressive."

Johnson calls on the government to reform council tax.

"If you are going to increase your reliance on it surely you are under even more of an obligation to reform it into something more rational," he says.

Yesterday, Sky News' political editor Beth Rigby asked the chancellor directly if councils tax would have to be raised. 

She said: "Are peoples' council tax bills going to go up, as a result of this spending review?

Reeves responded: "No."

She added: "Our commitment around 5% [increases] on council tax stands. This is not about increasing peoples' council tax, we've made that commitment, around 5%."

You can watch this interview in the video above.

IFS warns it's hard to see how 'relentless increase' in NHS funding can continue

We've reported on the mood music from the Institute for Fiscal Studies (IFS) on yesterday's spending review, which is Rachel Reeves is dangerously close to having to raise taxes (more in our previous post).

Let's dig a little deeper into the figures the IFS has crunched.

Not a return to austerity

IFS director Paul Johnson says the spending review is "not a period of austerity", with capital spending rising by 3.6% a year, and day-to-day public spending rising by 1.7%. 

This means investment spending as a fraction of GDP has risen from a recent low of 1.5% in 2013-2014, to 2.6% over this parliament - a 0.1% increase on 2023-24.

A decade of a growing state

On departmental spending specifically, Johnson points out this is also rising as a fraction of national income. 

It is going to reach 21.5% in 2028-29, compared to 20.7% in 2023-24. 

This is a "substantial increase in the size of the state", though he says this was mostly under the last government.

"This really is a decade of a growing state," he says.

Relentless increase in NHS funding - can it continue?

Turning to funding for the NHS, the jewel in Rachel Reeves' crown, and the IFS is more critical.

He says the Department of Health and Social Care will swallow 41% of day-to-day public spending by 2028-29, up from 39% in 2024 and just 26% in 2000-01.

Johnson says: "One has to question for how much longer this relentless increase can continue."

Even so, he questions whether it will be enough to achieve the government's waiting list targets or fund the workforce plan.

Could there be trouble ahead?

Johnson says as well as funding for the NHS rising, the commitment to spend 2.5% of GDP on defence by 2027 means other budgets are tight.

"With day-to-day budgets growing so slowly, there is not going to be much room for further significant increases in public sector pay," he warns, and there could be "trouble ahead" with the unions.

On the hardest hit departments, he says: "The aid budget is now pared back to its lowest level for a very long time."

Reeves a 'gnat's whisker' away from tax rises, says IFS

The chancellor is a "gnat's whisker" away from having to hike taxes further, the Institute for Fiscal Studies (IFS) has said.

Paul Johnson, the director of the independent economics thinktank, has given his verdict on the spending review.

He said the chancellor is "now going to have all her fingers and all her toes crossed, hoping that the Office for Budget Responsibility will not be downgrading their forecasts in the autumn". 

"With spending plans set, and 'ironclad' fiscal rules being met by a gnat's whisker, any move in the wrong direction will almost certainly spark more tax rises," he said.

IFS 'baffled' by Reeves' speech

Johnson has also been fairly critical about Rachel Reeves' appearance in the Commons yesterday.

The IFS was "baffled by the chancellor's speech", as it did "not appear to be a serious effort to provide any useful information to anybody".

Johnson said Reeves has made some "rather odd recent claims" about the economy improving, adding "neither the economic forecasts nor the public finances have improved relative to鈥� a year ago".

"Rather, the reverse."

Did ChatGPT get the spending review right? Treasury secretary gives his verdict

The chief secretary to the Treasury has called the Sky News-Chat GPT spending review projection "pretty good" and scored it 70%.

Darren Jones compared the real spending review, delivered by Rachel Reeves on Wednesday, and the Sky News AI (artificial intelligence) projection last week.

Sky News took the Treasury's spring statement, past spending reviews, the 'main estimates' from the Treasury website, and the Institute for Fiscal Studies' projections, and put them into ChatGPT, asking it to calculate the winners and losers in the spending review.

This was done 10 days ahead of the review - before several departments had agreed their budgets with the Treasury - on the basis of projections based on those public documents. 

The Sky News-AI projection correctly put defence and health as the biggest winners, the Foreign Office as the biggest loser, and identified many departments would lose out in real terms overall.

It suggested the education budget would be smaller than it turned out, but correctly highlighted the challenges for departments like the Home Office and environment.

The economy is stuck in a painful feedback loop

By Gurpreet Narwan, business and economics correspondent

Economists suspected the comfortable growth enjoyed at the beginning of the year might prove to be short-lived, and they appear to be right.

After expanding by 0.7% in the first quarter of the year, output struggled at the start of the second quarter, shrinking by 0.3% in April. The damp performance is likely to continue, with economists expecting a 0.1% decline over the second quarter.

The dashboard is flashing warning signs. The economic data for the start of the year was flattered by people bringing forward house purchases to beat the stamp duty holiday deadline, as well as businesses racing to get orders out of the door to beat possible US tariffs.

Tight headroom for Reeves

Now those temporary factors have faded away, we can better gauge the state of the economy. 

It makes for unpleasant reading: we're still being hobbled by low growth and high taxes and the two are re-enforcing each other.

Consumers have less space than usual to absorb price rises, with utility bills on the up and general inflation proving persistent. 

Taxes are already at a generational high, and they could go higher if the economy disappoints. 

The chancellor's headroom against her fiscal rule is tight, with debt interest payments on the country's debt eating into her room for manoeuvre.

Chancellor could be forced to hike taxes

The chancellor today pointed to factors outside of her control, hinting towards Donald Trump's tariffs policy. 

Most of Britain鈥檚 problems are domestic ones - high government borrowing costs, rising cost of living pressures and higher taxation, but geopolitical forces have also conspired against us.

All this matters for a chancellor with a historically small fiscal headroom. Even small changes in the growth outlooks could derail her plans, forcing further tax rises to pay for her spending plans.

She is betting big on investment in infrastructure - trains, nuclear power, social housing - but it could take many years for that to pay dividends, if it pays dividends at all. 

In the meantime, the debt continues to grow as she borrows to fund those projects, putting further pressure on her budget to cover the interest payments alone.

It's a painful feedback loop for the economy.

'Continued uncertainty will hamper investment,' warns business body

The British Chambers of Commerce said "businesses will be keen to see further action from the government", following this morning's economic growth data and the chancellor's spending review.

Stuart Morrison, the group's research manager, said: "The UK's partial trade deal with the US has offered some relief, but the lowering of tariffs on steel, aluminium and automotives is not yet fully assured.

"This continued uncertainty will inevitably hamper firms' investment decisions and long-term growth prospects."

'Clear tax roadmap' needed

Morrison said their own research has found more than four-in-five of businesses surveyed say the government's hike to employer national insurance contributions (NICs) will impact their operations.

He wants a "clear tax roadmap" from the chancellor to give businesses "some certainty to plan for the future", and a timeline for practical changes around the UK's trading relationship with the EU.