2 godzin temu
Chancellor Rachel Reeves faces a £41.2 billion shortfall on her fiscal rules and must resort to "moderate but sustained" tax rises to repair Britain's battered public finances, a leading economic think tank has warned. The National Institute of Economic and Social Research (Niesr) said weaker economic activity, welfare spending U-turns and higher-than-expected borrowing have created a "worsening fiscal outlook".
The Chancellor now confronts an "impossible trilemma" of trying to meet her fiscal rules whilst fulfilling spending commitments and honouring Labour's manifesto pledge not to raise taxes. Niesr cautioned that Reeves will need to raise taxes or cut spending in the autumn budget to plug the gap.
Economic growth forecasts revised
Despite the fiscal warnings, Niesr has nudged up its economic outlook for the UK, with growth of 1.3% now pencilled in for 2025, up from 1.2% forecast in May. However, the group cut its prediction for next year to 1.2%, down from 1.5% previously expected.
The think tank urged the Government to address public finance woes by building a "large fiscal buffer via a moderate but sustained increase in taxes". It said this approach would "help allay bond market fears about fiscal sustainability, which may in turn reduce borrowing costs".
Inflation concerns mount
Niesr warned the UK faces higher-than-forecast inflation, averaging around 3.5% this year and edging back only slightly to 3% in the second quarter of 2026. The persistent inflation is attributed to higher wages and Labour's measures in last autumn's budget.
Professor Stephen Millard, Niesr's deputy director for macroeconomics, said: "With growth at only 1.3% and inflation above target, 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." Despite inflation pressures, Niesr expects the Bank of England to cut interest rates from 4.25% currently to 3.5% at the beginning of 2026.
Fiscal rules under pressure
The Chancellor has set herself two fiscal rules - the "stability rule", which ensures day-to-day spending is matched by tax revenues so the Government only borrows to invest, and the "investment rule", which requires reducing net financial debt as a share of the economy. The £41.2 billion shortfall relates specifically to the stability rule in 2029-30.
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."
(PA) Note: This article has been edited with the help of Artificial Intelligence.
