As the UK heads into the Budget this autumn, speculation is mounting over whether Chancellor Rachel Reeves will be forced to raise taxes to plug a growing gap in the nation’s finances.
According to the National Institute of Economic and Social Research (Niesr), the government is on course to miss its own borrowing targets by £41.2 billion, unless action is taken. Niesr warns that a “moderate but sustained increase in taxes” may be the only realistic route for the government, particularly under the borrowing rules the chancellor has described as “non-negotiable.”
A “Trilemma” for Reeves
When Reeves became Chancellor, she set out two strict fiscal rules:
- Day-to-day government spending must be funded by tax revenues, not borrowing.
- Public debt must fall as a share of national income within five years.
These rules were intended to reassure investors and signal economic credibility. However, meeting them is becoming increasingly difficult as weaker-than-expected economic growth and the reversal of welfare cuts are expected to deliver less than previously forecast. The ongoing effect of US trade tariff policies on global trade is also a challenge.
Niesr says the chancellor faces a “trilemma” between:
- Fulfilling Labour’s spending commitments.
- Sticking to the manifesto promise not to raise taxes on working people.
- Meeting the self-imposed borrowing rules.
The deputy director for macroeconomics at Niesr, Stephen Millard, said that if the chancellor is going to be able to raise £40 billion, “I think one of the big taxes is going to have to be raised.”
Where Might Tax Increases Come From?
NIESR has suggested the government could raise revenue by:
- Extending the freeze on income tax thresholds beyond 2028 (a stealth tax that raises more as wages rise).
- Reforming council tax, or even replacing it with a land value tax.
- Changing the scope of VAT.
- Reforming pensions allowances.
A Difficult Autumn Ahead
With all these pressures converging, the upcoming Autumn Budget could be a significant one. However, whether it will include tax rises, stealth tax extensions, or reforms to the tax system, remains to be seen.
As always, we’ll be keeping a close eye on the Autumn Budget and any announcements that could affect you or your business. Once the details are confirmed, we’ll provide a clear summary highlighting what matters most - whether that’s changes to tax rates, allowances, or other measures.
If you have any questions about the effect of tax on your business or personal situation, please give us a call, we’ll be happy to help you.
See: https://www.bbc.co.uk/news/articles/cn85vyd1epzo