UK Chancellor Reeves Faces £51bn Fiscal Deficit, Tax Hike Pressure

Chancellor Rachel Reeves faces a significant fiscal challenge, with the National Institute of Economic and Social Research (NIESR) forecasting a £51.1 billion shortfall by 2029/30 due to weaker economic growth, rising borrowing, and policy reversals. To address this gap, NIESR warns that substantial tax increases or spending cuts will be necessary, including potentially raising both the basic and higher rates of income tax by five percentage points, which would break Labour’s manifesto pledge not to raise taxes on working people. Minor tax hikes, such as those on capital gains and inheritance tax, have backfired, causing taxpayers to delay gains or withdraw pension funds early to avoid higher taxes, leading to reduced revenues and increased financial strain on families. NIESR describes the situation as an “impossible trilemma” requiring the government to balance fiscal rules, public spending, and manifesto commitments, with some economists suggesting broader tax reforms like council tax changes or land value tax. Despite speculation, government officials have dismissed proposals for a wealth tax, emphasizing the need for moderate but sustained tax increases or spending adjustments in the upcoming budget. The economic outlook remains uncertain, with NIESR’s forecasts more pessimistic than the Office for Budget Responsibility, largely due to external factors such as global trade tensions.