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UK taxes may need to rise in autumn, Rachel Reeves warned - YAHOO FINANCE
BY Pedro Goncalves Finance Reporter, Yahoo Finance UK
The UK government is on course to breach its self-imposed fiscal rules, raising the prospect of tax increases later this year, the National Institute of Economic and Social Research (NIESR) has warned.
In its latest economic outlook, the think tank downgraded growth forecasts and highlighted a deteriorating fiscal position driven by weaker domestic demand and mounting global uncertainty. NIESR now expects UK GDP to expand by 1.2% in 2025 — down from its February estimate of 1.5% — citing “low business confidence, high uncertainty and rising cost pressures”.
The downgrade assumes tax receipts will fall below previous projections, making the government increasingly unlikely to meet its rules requiring national debt to fall as a share of GDP and the budget to be on course for a surplus by the end of the forecast period.
Chancellor Rachel Reeves claimed in the spring statement that the government was on track to maintain a £9.9bn fiscal buffer by 2029–30. However, NIESR now estimates a fiscal shortfall of £62.9bn by the same point, warning that ministers may have to choose between deeper spending cuts or politically sensitive tax hikes to close the gap.
"No headroom means tough choices for the chancellor ahead of the autumn budget," Benjamin Caswell, senior economist at the NIESR, said.
Labour has pledged to remain committed to its fiscal rules and not increase national insurance, VAT or income tax.
The current fiscal rules state that the Treasury cannot borrow to fund day-to-day spending, and that debt must fall as a share of national income by the end of a five-year forecast period.
“The chancellor’s self-imposed and arbitrary fiscal rules have led to a situation where twice a year the chancellor has to either find further departmental savings or announce politically unpalatable tax rises,” said Stephen Millard, NIESR’s interim director. “The uncertainty created by this leads to low investment and lower growth, the precise reverse of what the government wants to achieve. We have to rethink the fiscal framework.”
NIESR also revised its inflation forecast, expecting consumer price growth to average 3.3% in 2025, compared with 2.4% in its previous estimate. Inflation is set to peak at 3.2%, the think tank said.
Adrian Pabst, NIESR’s deputy director for public policy, said current government plans fall short of what is needed to boost productivity and improve living standards nationwide.
“The government’s ambition of boosting growth and living standards in every part of the United Kingdom requires a comprehensive, credible plan of economic transformation which is yet to emerge,” he said.
“While planning reform and infrastructure investments in London and the South East will add to GDP growth, we need higher public investment in second-tier cities and poorer regions to unlock greater business investment.”
The bleak assessment follows similar warnings from other international institutions. Last month, the International Monetary Fund reduced its UK growth forecast by 0.5 percentage points to 1.1 %, citing global trade frictions, including evolving US tariff policies.
