Reeves could turn to £20bn tax increase to fill shortfall

Rachel Reeves may need to raise taxes by more than £20bn in the autumn budget after figures showed the government's spending deficit reached £17.7bn in May, the second highest on record for the month.

- Phillip Inman

Analysts said a sharp increase in tax receipts had still fallen short of forecasts by the Office for Budget Responsibility (OBR), giving an indication of the weakness underpinning the public finances.

The chancellor's plans are also likely to be upended in the autumn when the budget watchdog is expected to revise down economic growth - further limiting the rise in tax receipts - and include higher borrowing costs, which are already above £100bn a year.

The combined effect would be to wipe out Reeves's £10bn "rainy day" buffer in the public finances and create another large financial hole, possibly as large as £10bn to £20bn.

Alex Kerr, a UK economist at Capital Economics, said a recent U-turn on cuts to the winter fuel allowance, downward revisions to the OBR's growth forecasts and higher borrowing costs "may mean that to maintain her current £9.9bn buffer, Reeves has to raise £13bn-£23bn later this year".