Rachel Reeves must raise taxes to cover £41bn gap, says think tank

Taxes May Increase in Autumn to Meet Borrowing Rules, Says Think Tank

According to the National Institute of Economic and Social Research (Niesr), Chancellor Rachel Reeves may need to raise taxes in the autumn to adhere to the government’s self-imposed borrowing rules. Niesr warned that the government is projected to miss its target by £41.2 billion, and recommended a gradual increase in taxes, including reforming the council tax system, to bridge the gap.

Reeves set out two key rules for government borrowing when she took office. The first rule stipulates that day-to-day spending should be covered by government revenue, primarily taxes, with borrowing allowed only for investment. The second rule requires a reduction in debt as a proportion of national income over a five-year period. Reeves has emphasized that these rules are non-negotiable.

Initially, the chancellor pledged not to raise taxes further, but recent economic growth data prompted a reconsideration of this stance. Stephen Millard, from Niesr, emphasized the need for tax hikes or spending cuts in the upcoming October Budget to meet fiscal targets.

Niesr highlighted that the £41 billion shortfall in the government’s budget is partly due to weakened economic growth, leading to lower tax revenues and increased borrowing. The reversal of welfare cuts, intended to save £5.5 billion annually by 2030, also contributed to the deficit.

The government faces a “trilemma,” as Niesr puts it, with competing priorities of meeting spending commitments, avoiding tax hikes for working individuals, and staying within borrowing limits. Niesr suggested prioritizing public expenditure supporting the vulnerable and safeguarding investments for future growth.

Reeves also faces challenges from external factors like potential trade policy changes by US President Donald Trump and rising National Insurance Contributions affecting business investments. Niesr stressed the importance of policies promoting growth and productivity to enhance living standards nationwide.

Despite the UK’s desire to be the fastest-growing G7 economy, Niesr projected modest growth rates for the country. The think tank did not specify which taxes should increase but recommended considering welfare spending reductions and reforming the council tax system.

While the Treasury focuses on economic growth to strengthen public finances, the opposition criticizes Labour’s economic management. Shadow Chancellor Sir Mel Stride accused Labour of creating a financial gap that may necessitate further tax hikes, despite reassurances from Rachel Reeves.