Story Highlight
– Chancellor Rachel Reeves faces potential autumn tax increases.
– Economic shortfall estimated at £41.2 billion by Niesr.
– Labour’s tax promises may conflict with borrowing rules.
– Government aims to boost living standards amid economic challenges.
– Niesr recommends council tax reform for revenue generation.
Full Story
The National Institute of Economic and Social Research (NIESR) has indicated that, for Chancellor Rachel Reeves to adhere to her borrowing guidelines, tax increases may be necessary this autumn. The think tank estimates that the government is projected to fall short of its fiscal target by £41.2 billion.
In a recent recommendation, NIESR proposed a “moderate but sustained increase in taxes,” which includes a call for reforming the council tax system to help bridge this financial gap. Prime Minister Sir Keir Starmer, speaking during a visit to a school in Buckinghamshire, defended the government’s economic strategy but did not confirm whether tax hikes would be part of the forthcoming Budget. In response to questions about the NIESR’s assessment, he acknowledged discrepancies in the figures being circulated. “In the autumn, we’ll get the full forecast and obviously set out our Budget,” he stated, emphasizing that the Budget would prioritize improving living standards.
NIESR, which operates independently of political affiliations, suggested that the government could bolster its revenue through measures such as adjusting the VAT framework, altering pension allowances, and maintaining the freeze on income tax thresholds, due to conclude in 2028. Upon assuming her role, Chancellor Reeves established two principles for borrowing: the first requires that ongoing public expenditure be financed entirely through government revenue, with borrowing confined to investment purposes; the second dictates that national debt must reduce as a percentage of income within five years. Reeves has consistently described these rules as “non-negotiable.”
While initially vowing not to raise taxes, Reeves has recently indicated that all options remain on the table following disappointing economic growth figures. Labour’s manifesto promised not to increase taxes on “working people,” yet the think tank has outlined a “trilemma” for the Chancellor regarding her commitments: fulfilling spending pledges, honoring her manifesto promises, or maintaining her self-imposed borrowing limits. Stephen Millard, NIESR’s deputy director for macroeconomics, remarked on the importance of the choices ahead, stating, “If she wants to raise £40bn then I think one of the big taxes is going to have to be raised.” He cautioned that any increase in taxation could undermine Labour’s promise to keep working people’s taxes stable.
According to NIESR, introducing tax increases could help create a fiscal “buffer,” reassuring investors about the UK’s financial stability and potentially leading to lower borrowing costs for the government. Starmer reiterated support for the government’s economic management, asserting that Labour has contributed to stabilizing the economy and enhancing wages.
NIESR attributes the shortfall in the budget partly to slowing growth in recent months, which has led to reduced tax revenue and heightened borrowing demands. It also noted that adjustments to welfare cuts, which were initially intended to save £5.5 billion annually by 2030, now project far lesser savings due to backlash within the Labour Party. The organization recommended expediting initiatives to assist welfare recipients in securing employment as a further strategy to control spending.
Investment director at AJ Bell, Russ Mould, pointed out external uncertainties impacting the UK, including potential developments in trade and tariffs under US leadership. He also noted that the rise in National Insurance Contributions for employers has been a deterrent to corporate investment.
Acknowledging the significance of the upcoming Budget, a senior government source described it as potentially “the most significant Budget of this parliament.” NIESR further advocated for government policies that focus on promoting growth and productivity to elevate living standards nationwide, indicating that the poorest 10% of the population presently experiences living standards 10% below pre-Covid levels.
Despite having aimed to position the UK as the fastest growing nation within the G7 upon taking office a year ago, the government confronts uncertainties in trade and geopolitical dynamics. NIESR forecasts modest growth rates of 1.3% for 2025 and 1.2% for 2026, placing the UK in a mid-tier position relative to G7 counterparts.
The think tank also recommends an overhaul of council tax, proposing alternatives such as a land value tax. In response, a Treasury spokesperson reiterated the government’s focus on economic growth as the optimal route to strengthening public finances. Conversely, Shadow Chancellor Sir Mel Stride accused Labour of failing to grasp economic realities, suggesting that their management has led to a fiscal deficit that will likely necessitate further tax increases, contrary to previous commitments made by Reeves.
