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An economic think tank has asserted that taxes will need to increase in the autumn if Chancellor Rachel Reeves intends to adhere to her self-imposed borrowing regulations.
The National Institute of Economic and Social Research (Niesr) projects that the government is on course to miss its own target by £41.2bn.
To compensate for the shortfall, Niesr recommends “a moderate but sustained increase in taxes,” including reforms to the council tax system.
Prime Minister Sir Keir Starmer defended the government’s economic management but refrained from explicitly addressing whether taxes would rise in the forthcoming Budget.
When questioned during a visit to a school in Buckinghamshire about his disagreement with Niesr’s assessment that tax increases would be necessary, the prime minister stated that “some of the figures that are being put out are not figures that I recognise.”
He added, “In the autumn, we’ll get the full forecast and obviously set out our Budget,” emphasizing that the Budget would prioritize living standards and “making sure that people feel better-off.”
Niesr, an independent body, suggested that the government could generate revenue by adjusting the scope of VAT, pensions allowances, and extending the freeze on income tax thresholds, which is currently scheduled to end in 2028.
Upon assuming the chancellorship, Reeves established two rules governing government borrowing, defined as the difference between public spending and tax revenue.
The first rule stipulates that day-to-day spending must be financed through government revenue, primarily taxes, with borrowing reserved for investment purposes only.
The second rule mandates that debt must decline as a proportion of national income by the conclusion of a five-year period.
Reeves has consistently affirmed the “non-negotiable” nature of these rules.
While the chancellor initially pledged against further tax increases, she recently declined to rule them out following disappointing economic growth data.
Labour’s manifesto commits to refraining from raising taxes such as income tax, VAT, or national insurance on “working people.”
The think tank posits that the chancellor now faces a “trilemma” in deciding which pledges to prioritize: meeting spending commitments, upholding manifesto promises to avoid tax increases on working individuals, or adhering to borrowing limits.
Stephen Millard, deputy director for macroeconomics at Niesr, stated on the BBC’s Today programme: “If she wants to raise £40bn then I think one of the big taxes is going to have to be raised.”
“If she does that then it will break the Labour promise about raising taxes on working people.”
Niesr contends that raising taxes would contribute to establishing a “buffer” that would reassure investors regarding the stability of the UK’s public finances.
This, in turn, “may reduce borrowing costs” for the government, it stated.
Sir Keir affirmed his support for the government’s economic management, asserting that Labour has “stabilised the economy” and “raised wages as well.”
Niesr attributed the shortfall in the government’s budget, in part, to weaker growth in recent months, resulting in lower tax revenue and increased government borrowing.
However, the reversal of welfare cuts, initially projected to save £5.5bn annually by 2030, has also had an impact, it noted.
The welfare cuts were scaled back following internal opposition within the Labour Party and are now anticipated to yield less than half of the originally projected savings.
Furthermore, it suggested that the government should consider reducing welfare spending by accelerating initiatives to assist benefit recipients in securing employment.
According to Russ Mould, investment director at AJ Bell, another challenge for Reeves is anticipating the next steps of US President Donald Trump “in terms of trade and tariffs and what that could do to global trade flows.”
He also conveyed on the BBC’s Today programme that the rise in National Insurance Contributions for employers, which took effect in April, is deterring firms from investing.
There is already an acknowledgment at the highest levels of government that the Autumn Budget will be a challenging period, with one senior source characterizing it to the BBC as the “most significant Budget of this parliament.”
Niesr emphasized that the government’s other priority should be policies aimed at promoting growth and productivity to elevate living standards across the UK.
It stated that the living standards of the poorest 10% of the population are currently 10% lower than pre-Covid levels.
Upon assuming power a year ago, Labour articulated its ambition to make the UK the fastest-growing country in the G7 group of nations.
However, the thinktank observed that the UK has encountered trade policy uncertainty, geopolitical risk, as well as domestic challenges.
Niesr stated that its analysis suggests the economy will experience “modest” growth of 1.3% in 2025 and 1.2% in 2026, positioning the UK in the middle of the G7 economies.
The IMF recently indicated that it anticipates the UK will be the third-fastest-growing economy among the world’s most advanced economies this year and the next, following the US and Canada.
Niesr also proposed that the chancellor should consider reforming council tax or even replacing it entirely with a land value tax.
A Treasury spokesperson stated: “As set out in the plan for change, the best way to strengthen public finances is by growing the economy – which is our focus.”
However, shadow chancellor Sir Mel Stride accused Labour of misunderstanding the economy.
“Experts are warning Labour’s economic mismanagement has blown a black hole in the nation’s finances which will have to be filled with more tax rises – despite Rachel Reeves saying she wouldn’t be back for more taxes,” he added.
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