**Taxes Must Increase to Meet Targets, According to Economic Think Tank**
In a recent analysis, the National Institute of Economic and Social Research (NIESR) has made significant assertions regarding the UK government’s fiscal policies, bluntly stating that a rise in taxes will be necessary if Chancellor Rachel Reeves is to satisfy her self-imposed borrowing regulations. The think tank’s insights come at a pivotal moment as the government grapples with economic challenges that threaten to derail its financial targets.
NIESR has projected that the government is on course to exceed its self-determined budgetary limit by an alarming £41.2 billion. In light of this situation, they have recommended implementing a “moderate but sustained increase in taxes,” which encompasses essential reforms to the current council tax system aimed at bridging this financial gap. The think tank’s recommendations aim to provide a clear path forward for the government as it faces mounting pressures.
In a response to these findings, the government has maintained its stance that the primary method to strengthen public finances is through robust economic growth. However, the opposition, particularly the Conservative Party, argues that the Labour government consistently opts for increased taxes as a solution to fiscal deficits. This ongoing debate highlights the differing strategies of the two major political parties in addressing the nation’s economic dilemmas.
Upon taking office, Chancellor Reeves established two fundamental rules regarding government borrowing. The first rule emphasizes that day-to-day expenditure should be financed through government revenue, primarily generated from taxes, with borrowing reserved exclusively for investment purposes. The second rule insists that national debt must gradually decline as a proportion of national income by the conclusion of a five-year period. Reeves has reiterated that these rules are “non-negotiable,” underscoring her commitment to fiscal responsibility.
Initially, Chancellor Reeves pledged not to raise taxes, a promise she has since revised in light of disheartening economic performance data. Stephen Millard, deputy director of macroeconomics at NIESR, articulated that Reeves must contemplate tax increases, spending reductions, or a combination of both in the forthcoming October Budget if she hopes to adhere to her fiscal guidelines. NIESR argues that increasing taxes would create a financial buffer, reassuring investors about the stability of the UK’s public finances, which could, in turn, help lower the government’s borrowing costs.
The think tank projects that the government’s £41 billion shortfall stems partially from the recent decrease in economic growth, leading to a smaller tax yield and an increase in government borrowing. Furthermore, the retraction of previous welfare cuts, initially intended to save £5.5 billion annually by 2030, has also contributed to this budgetary shortfall. As a result, NIESR described a “trilemma” facing Chancellor Reeves. She must now navigate her commitments to maintain public spending, avoid tax increases on working individuals, and meet her established borrowing limits, without which one of these obligations is likely to falter.
In its analysis, NIESR recommended that the government prioritize protecting public expenditures that assist the most vulnerable demographics, while also preserving public investments that foster future economic growth. It also cautioned that the standard of living for the lowest 10% of the population has regressed to 10% lower than pre-pandemic levels.
Despite political opposition, NIESR noted that the government’s growth targets face various challenges such as trade policy ambiguity and geopolitical risks. Nevertheless, forecasts estimate modest growth for the UK economy, pegging expected growth rates at 1.3% in 2025 and 1.2% in 2026, suggesting the UK remains competitive within the G7 economies. The International Monetary Fund (IMF) recently indicated that the UK might rank as the third-fastest growing economy among the world’s leading economies within the next two years, following the US and Canada.
However, inflation continues to pose a challenge, with rates projected at a stubborn 3.5% this year and 3% next year. NIESR did not specify which taxes should rise or to what extent but recommended that the government simultaneously consider minimizing welfare spending while accelerating efforts to assist individuals reliant on benefits in entering the workforce. Furthermore, suggestions were made for an overhaul of the council tax system or possibly its replacement with a land value tax.
In a final comment, a Treasury spokesperson reiterated the commitment to bolstering public finances through economic growth, reflecting the government’s ongoing strategies. Conversely, Shadow Chancellor Sir Mel Stride criticized Labour’s economic approach, stating that experts have warned about Labour’s fiscal mismanagement potentially necessitating further tax increases, despite Chancellor Reeves’ prior assurances against additional taxes.
