Thursday, August 07, 2025
A growing black hole?
Judging from yesterday's news reports the same process is taking place around the predicted deficit being faced by the Chancellor of the Exchequer in this year's budget.
The Independent reports that top economists have warned that Rachel Reeves faces an “impossible trilemma” ahead of the autumn budget and must raise taxes or tear up her flagship borrowing rules to fill a £50bn black hole left by Labour U-turns, higher borrowing and sluggish economic growth.
The paper quotes the National Institute of Economic and Social Research (NIESR), a leading economic think tank, who believe that the chancellor could also look at spending cuts in the autumn Budget as a way to raise the money needed by 2029-30 to remedy a £41.2bn shortfall on her borrowing targets, set out by her self-imposed “stability rule”.
They add that in order to restore the £9.9bn buffer the government has maintained since last year’s Budget, the chancellor must therefore raise a total of £51.1bn:
The NIESR’s report said the chancellor has been left with the difficult task of trying to meet her fiscal rules while fulfilling spending commitments and upholding a manifesto pledge not to raise taxes on working people.
But after a swathe of spending cuts squeezing departmental budgets at the last spending review, tax rises are the more likely option.
On Wednesday Keir Starmer refused to rule out tax rises in the Budget, amid growing pressure on the government.
Declining to explicitly rule out raising VAT, income tax and corporation tax, he said: "In the autumn, we'll get the full forecast and obviously set out our Budget."
The chancellor is under increasing pressure to raise income tax or consider a wealth tax on the rich.
The think tank’s forecast warned that the poorest 10 per cent of people – amounting to 2.8 million households – have seen their living standards fall 1.3 per cent under Labour, some 10 per cent lower than pre-Covid levels.
Professor Stephen Millard, NIESR’s deputy director for macroeconomics, said a “credible, sustained increase in taxes” would be required due to the “worsening fiscal outlook”, not helped by Labour’s U-turns on welfare cuts.
He warned that a large part of this would need to happen in the first year to signal to the markets that the Treasury is committed to further increases down the line.
Speaking at a press conference on Tuesday, Prof Millard warned that the £9.9bn buffer the chancellor has set out for herself is “really way too thin”, and a “slight change in fiscal circumstances” would wipe it out entirely.
“With growth at only 1.3 per cent 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,” he added.
It comes despite the think tank nudging up its economic outlook for the UK, with growth of 1.3 per cent expected for 2025, up from 1.2 per cent forecast in May. But it cut its prediction for next year – to 1.2 per cent, down from 1.5 per cent.
Prof Millard also suggested the chancellor could rewrite her fiscal rules with a new framework that looks at the long-term direction of travel of debt, rather than judging debt based on a point five years in the future, as the current rules dictate.
He told The Independent the government should base its financial projections on current levels of taxation and spending, rather than planned increases or decreases.
Whatever the outcome, it is difficult to see how Starmer's promise to improve our living standards is going to be delivered in these circumstances.
The NIESR’s report said the chancellor has been left with the difficult task of trying to meet her fiscal rules while fulfilling spending commitments and upholding a manifesto pledge not to raise taxes on working people.
But after a swathe of spending cuts squeezing departmental budgets at the last spending review, tax rises are the more likely option.
On Wednesday Keir Starmer refused to rule out tax rises in the Budget, amid growing pressure on the government.
Declining to explicitly rule out raising VAT, income tax and corporation tax, he said: "In the autumn, we'll get the full forecast and obviously set out our Budget."
The chancellor is under increasing pressure to raise income tax or consider a wealth tax on the rich.
The think tank’s forecast warned that the poorest 10 per cent of people – amounting to 2.8 million households – have seen their living standards fall 1.3 per cent under Labour, some 10 per cent lower than pre-Covid levels.
Professor Stephen Millard, NIESR’s deputy director for macroeconomics, said a “credible, sustained increase in taxes” would be required due to the “worsening fiscal outlook”, not helped by Labour’s U-turns on welfare cuts.
He warned that a large part of this would need to happen in the first year to signal to the markets that the Treasury is committed to further increases down the line.
Speaking at a press conference on Tuesday, Prof Millard warned that the £9.9bn buffer the chancellor has set out for herself is “really way too thin”, and a “slight change in fiscal circumstances” would wipe it out entirely.
“With growth at only 1.3 per cent 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,” he added.
It comes despite the think tank nudging up its economic outlook for the UK, with growth of 1.3 per cent expected for 2025, up from 1.2 per cent forecast in May. But it cut its prediction for next year – to 1.2 per cent, down from 1.5 per cent.
Prof Millard also suggested the chancellor could rewrite her fiscal rules with a new framework that looks at the long-term direction of travel of debt, rather than judging debt based on a point five years in the future, as the current rules dictate.
He told The Independent the government should base its financial projections on current levels of taxation and spending, rather than planned increases or decreases.
Whatever the outcome, it is difficult to see how Starmer's promise to improve our living standards is going to be delivered in these circumstances.
