The UK is on the brink of a fiscal crisis as Rachel Reeves has left a £40 billion gaping hole in public finances. A leading economic think tank is now warning that the Chancellor must resort to “moderate but sustained” tax rises to help repair Britain’s battered economy. The National Institute of Economic and Social Research (Niesr) has pointed to U-turns on welfare cuts, high borrowing and weak economic activity for creating a “worsening fiscal outlook”.
Ms Reeves is now set for a £41.2 billion shortfall on her “stability rule” in 2029-30 – this ensures that day-to-day spending is matched by tax revenues so the Government only borrows to invest. Niesr warns that Labour will need to raise taxes, again, or cut spending in the Autumn Budge to plug the gap. The group has now cut its UK growth precision for next year to 1.2%, down from 1.5% previously expected.
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The think tank is urging the government to build a “large fiscal buffer via a moderate but sustained increase in taxes”.
“This will help allay bond market fears about fiscal sustainability, which may in turn reduce borrowing costs,” it said. “It will also help to reduce policy uncertainty, which can hit both business and consumer confidence.”
Professor Stephen Millard, Niesr’s deputy director for macroeconomics, said: “With growth at only 1.3% 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.”
The UK is set for higher-than-forecast inflation, averaging around 3.5% this year, Niesr warns, edging back only slightly to 3% in the second quarter of 2026.
Despite the warning of tax rises, the think tank expects the Bank of England to cut interest rates from 4.25% currently to 3.5% at the beginning of 2026.