UK Chancellor Rachel Reeves is under mounting pressure to raise taxes this autumn after a leading economic think tank warned that the government is on track to miss its self-imposed borrowing targets by over £41 billion.
According to the National Institute of Economic and Social Research (NIESR), Reeves will need to introduce a “moderate but sustained” tax increase if she intends to comply with the fiscal rules she set upon entering office. These include ensuring day-to-day spending is covered entirely by tax revenues and that debt falls as a share of GDP by the end of a five-year period.
The warning marks a pivotal moment for Rachel Reeves, who has positioned herself as a fiscally responsible leader committed to avoiding reckless spending. However, with economic growth underwhelming and welfare savings falling short, Reeves may face a difficult political choice: raise taxes or abandon her borrowing rules.
Economic Pressures Mount
NIESR’s analysis highlights a £41.2bn shortfall, exacerbated by weak GDP growth and reduced tax revenues. Notably, the government’s rollback of planned welfare cuts—originally expected to save £5.5bn annually—has left a sizable gap in fiscal planning. Additionally, the rise in employer National Insurance Contributions has dampened business investment, according to industry voices like AJ Bell and Domino’s Pizza.
While Rachel Reeves has reiterated that her borrowing rules are “non-negotiable,” she has recently stopped short of ruling out tax increases, signaling a possible shift in position as economic pressures intensify.
Which Taxes Could Be Raised?
The think tank proposes several options, including reforms to council tax, an extended freeze on income tax thresholds (currently set to end in 2028), and broader changes to VAT and pension allowances. These measures, while politically sensitive, could help Reeves maintain her fiscal credibility with investors and markets.
“Raising taxes now would build a buffer that reassures global markets about the UK’s long-term stability,” said Stephen Millard, NIESR’s deputy director for macroeconomics. “It may even reduce future borrowing costs.”
Despite her party’s manifesto commitment not to raise income tax, VAT, or National Insurance on “working people,” the economic landscape may force Reeves to consider otherwise. Experts warn that failure to act could undermine Labour’s long-term economic agenda.
Reeves’ Trilemma: Spending, Taxes, or Borrowing?
The Chancellor now faces what NIESR calls a “trilemma”: she must choose between her three main economic commitments—meeting spending goals, sticking to tax promises, or keeping debt under control. Fulfilling all three appears increasingly unlikely.
As the first woman to serve as UK Chancellor, Rachel Reeves has sought to establish a legacy rooted in economic transformation and sustainable growth. But the latest projections show the UK economy growing at just 1.3% in 2025 and 1.2% in 2026—far from the “fastest-growing G7 economy” vision outlined by Labour.
Market Uncertainty Ahead of the Autumn Budget
Businesses and investors are now eyeing the upcoming Autumn Budget for clarity. Uncertainty around potential tax increases is reportedly slowing down decisions in sectors like retail and franchising. Domino’s Pizza, for instance, has delayed new store openings as it waits for fiscal policy guidance.
Moreover, global trade uncertainties—especially potential shifts in U.S. policy under Donald Trump—are compounding domestic economic challenges.
A Critical Test for Reeves’ Economic Credibility
With both domestic constraints and international risks on the horizon, Rachel Reeves is navigating one of the most complex fiscal environments of recent times. Whether she can balance growth, fiscal responsibility, and political promises remains to be seen.
What’s clear is that the coming months will be a defining period for the Chancellor and the economic future of the UK.
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