Chancellor Reeves Faces £40bn Tax Rise or Spending Cut Requirement

Rachel Reeves faces a significant fiscal challenge, with the National Institute of Economic and Social Research (NIESR) warning of a £41.2 billion shortfall on her 'stability rule' by 2029-30. This gap results from slower economic growth, higher inflation, increased borrowing, and Labour’s U-turns on welfare spending cuts, creating what NIESR describes as an 'impossible trilemma' between meeting fiscal rules, fulfilling spending commitments, and maintaining manifesto promises not to raise taxes on working people. To address this, the think tank recommends 'moderate but sustained' tax increases, potentially including a 5p rise in income tax rates and reforms to council tax, or alternatively, spending cuts. NIESR stresses the need for a larger fiscal buffer to reassure financial markets and reduce borrowing costs, suggesting that relying solely on borrowing could spook markets and increase financial instability. The forecast also highlights that the poorest households have experienced a decline in living standards under the current government, emphasizing the social impact of the economic situation. Overall, tax rises appear the most likely necessary measure to restore fiscal stability, despite Labour’s prior manifesto commitments.