Chancellor warned ‘tax rises needed to fill £51bn black hole in public finances’
Chancellor Rachel Reeves will likely have to raise taxes as part of “substantial” action needed at the autumn budget to plug a £51 billion black hole in the public finances, a major economic think tank has warned.
The National Institute of Economic and Social Research (Niesr) said weaker-than-expected recent economic activity, U-turns on welfare cuts and forecast-beating borrowing mean Ms Reeves is on track to miss one of her fiscal rules by £41.2 billion in 2029-30.
It cautioned she faces an “impossible trilemma” of trying to meet her fiscal rules while fulfilling spending commitments and upholding a manifesto pledge not to raise taxes.
Including the need to rebuild the fiscal buffer of just under £10 billion that has been wiped out, she will have to find over £51 billion, according to the group.
In its latest economic outlook, Niesr said she will likely need to break her pledge not to raise taxes for working people and resort to “moderate but sustained” hikes, or cut spending, to address the shortfall.
“Substantial adjustments in the autumn budget will be needed if the Chancellor is to remain compliant with her fiscal rules,” said Niesr.
Speculation
The report has fuelled speculation over how the Government may look to boost tax revenues in the autumn, including mounting rumours of a possible wealth tax.
Professor Stephen Millard, Niesr’s deputy director for macroeconomics, said: “Things are not looking good for the Chancellor, who will need to either raise taxes or reduce spending or both in the October budget if she is to meet her fiscal rules.”
Niesr said if the Government moved to extend the income tax threshold beyond 2028, it would bring in around £8.2 billion – far short of what is needed.
To fill the £51 billion black hole would require a rise in the basic and higher rates of income tax by five percentage points, according to the group.
It is recommending “gradual” tax rises and for the Chancellor to look at reforms, such as overhauling the council tax bands and possibly replacing it with a land value tax.
Culture Secretary Lisa Nandy again ruled out introducing a wealth tax in response to warnings the Chancellor could miss her fiscal targets by £40 billion.
She told Sky News: “The Chancellor has very much poured cold water on that idea, partly because many countries have tried this sort of approach, but mostly because we were elected as a government in a time when taxes on working people were at their highest rate for generations.
“We want to bring taxes down for people, we want to help support them, put money back into people’s pockets, and all the things that we’ve been doing as a government in the last 12 months have been aimed at that.”
Niesr has urged the Government to look at addressing the public finance woes by building a “large fiscal buffer via a moderate but sustained increase in taxes”.
It said: “This will help allay bond market fears about fiscal sustainability, which may in turn reduce borrowing costs.
“It will also help to reduce policy uncertainty, which can hit both business and consumer confidence.”
Rules
The Chancellor has set herself two fiscal rules – the “stability rule”, which ensures that day-to-day spending is matched by tax revenues so the Government only borrows to invest, and the “investment rule”, which requires the Government to reduce net financial debt as a share of the economy.
Shadow chancellor Sir Mel Stride said: “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.
“Labour will always reach for the tax rise lever because they don’t understand the economy.”
Elsewhere in the report, Niesr nudged up its economic outlook for the UK, with growth of 1.3% pencilled in for 2025, up from 1.2% forecast in May.
But the group cut its prediction for next year to 1.2%, down from 1.5% previously expected.
Niesr also said the UK was in store for higher-than-forecast inflation, averaging around 3.5% this year and edging back only slightly to 3% in the second quarter of 2026.
Despite the inflation pressures, Niesr expects the Bank of England to cut interest rates from 4.25% currently to 3.5% at the beginning of 2026.
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Apparently only 56% of the working age population is in full-time employment. The UK Government Chancellor can’t keep expecting middle income earners to keep the UK afloat. Those classed as being wealthy must start to pay more.
.. and those of working age not earning and paying tax need to start doing so. Only the genuinely disabled should be reliant long term on the benefits system. Our dependency culture is far too widespread.
At the other end of the scale some shift towards a wealth tax is necessary as well as a new higher income tax band. And shut those loopholes that allow corporates and high net worth types to wave 2 fingers at their obligations.
Agreed. We need a wealth tax. If not name and shame and stop buying from those that don’t wish to contribute.
It depends on how you measure it (students etc), but we are largely on-par with most European countries in this regard. In some data, we are higher than some nations with higher GDP per person.
And serious politicians start to look at the state we can afford rather than trying to please everyone.
I would add the public needs to trust those politicians and start ignoring the noise from the media and opposition parties. The odd thing is we seem to have two polar sets of politicians. About half of them think we are overtaxed, and the other think the rich aren’t taxed enough. And neither of them thinks through, or even acknowledge, the consequences of their competing visions. It’s depressing read news articles this morning; one national paper supported Brexit, didn’t support benefits cut or WFA cut, wants lower taxes, higher pensions, lower pension age, and is still outraged that public sector… Read more »
Early retirement is a concern. We need to get the boomers back to work and making a success of their Brexit vanity project.
My wife and myself are 2 elderly who where not gullible enough to listen to the lies from the like of Farage and Boris to vote to leave and i know a lot of elderly friends who did not vote to leave either
Unfortunately you’re in a small minority of sensible decent people because the over 65s were the only demographic to back the self-sanctioning with a supermajority of 60%.
Just introduce a wealth tax.
A quick win would be to stop people taking a tax-free lump sum before the state retirement age. Privately funded early retirement is one thing, the state subsidising it is quite another.
If they retire early, they don’t get as much pension than if they worked longer. That is why I am still working. But a wealth tax would help fill in the deficit and get our rich to contribute evenly.
We need retirees working until they are physically unable to help pay for Brexit. Let’s abolish the retirement age completely and replace it with a fitness for work test.
Always sounds great getting everyone to work until they are dead but as we get older, our brains and bodies are just not that great. Let the rich contribute more. They got plenty of dough. They will be fine. No need to feel sorry for them.
But that would be hitting most politicians. We cannot possibly have that!! No, the working man, pensioners and the poor must take the hit every time to keep the wealthy in the manner they are accustomed to.
That was the point of Brexit.
The EU was gunning for the tax avoiding super wealthy so we had to leave.
All in the name of freedom .. freedom for the super wealthy to keep their money, all funded by the working man, pensioners and the poor.
But that’s democracy.
Big hit when we left the EU. That is the direction we need to steer. India deal is a fraction of what we lost.
UK is stuffed until we do.
When Labour took office Rachel Reeves announced there was a £22bn black hole. Last week it was £40bn. Today it’s £51bn. Which one is it Rachel? Seems Labour is increasing our deficit by the day!!
The first black hole was just the money the Cons had commited to spend but not actually budgeted for.
Fixing the stuff they broke is extra.
I assume you want more prison space?