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BBC News reporter Lucy Hooker recently highlighted that an economic thinktank, the National Institute of Economic and Social Research (Niesr), believes that Chancellor Rachel Reeves will need to increase taxes in the upcoming autumn to adhere to her self-imposed borrowing rules. Niesr indicated that the government is projected to fall short of its target by £41.2 billion and suggested implementing a gradual tax hike, including reforming the council tax system, to make up for the deficit. While the government emphasized that boosting the economy is the most effective way to fortify public finances, the Conservatives criticized Labour for leaning towards tax increases.
Upon assuming her role as chancellor, Reeves outlined two key rules for government borrowing, emphasizing that day-to-day spending should be covered by tax revenue, while debt should decrease in relation to national income within a five-year timeframe. Reeves staunchly reiterated that these rules are non-negotiable. Despite her initial pledge against raising taxes further, she did not rule out the possibility following disappointing data on economic growth. Niesr’s deputy director for macroeconomics, Stephen Millard, noted that Reeves may have to raise taxes, reduce spending, or pursue a combination of both in the October Budget to conform to her fiscal rules and build a financial buffer to reassure investors.
Niesr attributed the £41 billion shortfall in the government’s budget to a combination of weakened economic growth, resulting in decreased tax revenues and heightened borrowing, as well as the modification of welfare cuts originally intended to yield savings of £5.5 billion annually by 2030. The thinktank pointed out that the government now faces a “trilemma” regarding fulfilling commitments on spending, manifesto promises to avoid tax hikes, and borrowing limits, suggesting that one of these must be sacrificed. Niesr emphasized safeguarding public expenditure for vulnerable groups and promoting public investments aiding future growth as top priorities. The analysis also underscored the necessity of policies fostering growth and productivity to enhance living standards across the UK, particularly emphasizing the need to lift the poorest 10% of the population out of their current 10% lower-than-pre-Covid living standards
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