London, August 7: Britain’s Chancellor Rachel Reeves must raise taxes this autumn to meet her fiscal rules, a leading economic think tank warned on Wednesday, forecasting a £41.2 billion hole in the public finances that threatens the government’s fiscal credibility.
The National Institute of Economic and Social Research (NIESR) said the Labour government is on course to miss its self-imposed borrowing targets unless it implements “a moderate but sustained increase in taxes.” It urged reforms to council tax, expansion of VAT scope, and potential extensions to frozen income tax thresholds beyond 2028.
“If she wants to raise £40 billion, then one of the big taxes is going to have to be raised,” said Stephen Millard, NIESR’s deputy director for macroeconomics. “If she does that, then it will break the Labour promise about raising taxes on working people.”
Reeves, who took over the Treasury last year under Prime Minister Keir Starmer’s leadership, set two fiscal rules: all day-to-day spending must be covered by tax revenues, and debt must fall as a share of national income within five years. She has repeatedly described these principles as “non-negotiable.”
Pressed during a school visit in Buckinghamshire, Starmer declined to confirm whether taxes would rise, saying: “Some of the figures that are being put out are not figures that I recognise. In the autumn, we’ll get the full forecast and obviously set out our Budget.”
Labour’s election manifesto ruled out increases to income tax, VAT, and National Insurance Contributions for “working people.” However, sluggish economic growth, lower-than-expected tax receipts, and higher borrowing have complicated those promises.
The NIESR analysis cited a range of contributing factors to the fiscal shortfall, including the government’s partial reversal of welfare cuts – originally projected to save £5.5 billion annually by 2030 – and ongoing trade and geopolitical uncertainty, particularly related to U.S. tariff policy under President Donald Trump.
Russ Mould, investment director at AJ Bell, warned that the increase in employer National Insurance contributions introduced in April was deterring business investment. He also noted concerns over possible global trade disruptions.
The think tank forecasts modest GDP growth of 1.3% in 2025 and 1.2% in 2026, putting the UK mid-range among G7 economies. It also said the poorest 10% of UK households are now 10% worse off than before the COVID-19 pandemic.
A Treasury spokesperson reiterated that the government’s strategy to strengthen public finances hinges on economic growth. “As set out in the plan for change, the best way to strengthen public finances is by growing the economy – which is our focus.”
But political pressure mounted from the opposition, with Conservative Shadow Chancellor Mel Stride accusing Labour of economic mismanagement. “Experts are warning Labour’s economic mismanagement has blown a black hole in the nation’s finances,” he said. “Despite Rachel Reeves saying she wouldn’t be back for more taxes, it’s clear more tax rises are coming.”
Senior government sources have privately acknowledged the upcoming autumn Budget will be a critical moment. One official described it as “the most significant Budget of this parliament.”
