Rachel Reeves will have no choice but to introduce sustained tax hikes to paper over a deepening black hole in Britain’s finances, as her economic plans unravel, a think tank has warned. The National Institute of Economic and Social Research (Niesr) said a cocktail of poor economic performance, soaring borrowing, and her own U-turns on welfare reform have pushed the UK into a “worsening fiscal outlook”.
The Chancellor is now on course to miss her key “stability rule” by a massive £41.2billion by 2029-30, claims Niesr, putting her in what it calls an “impossible trilemma”: keep to her fiscal rules, deliver spending promises, or stick to her manifesto pledge not to raise taxes. She cannot do all three, it insists.
Unless she slashes spending or hikes taxes, the Chancellor will break her own rules, the think tank said – warning the moment of reckoning will come in the autumn budget.
This stark message lands despite a slight upgrade to the UK’s growth forecast. Niesr now expects GDP to grow 1.3% in 2025, up from its earlier 1.2% prediction in May. But its outlook for 2026 has worsened, with growth downgraded from 1.5% to 1.2%.
Niesr is urging the government to act decisively, calling for a “moderate but sustained” rise in taxes to rebuild a fiscal buffer, restore market confidence, and avoid higher borrowing costs.
The warning is particularly damaging given Labour’s public stance on tax. Ms Reeves has repeatedly said she has no plans to introduce major new tax rises, but Niesr makes clear that doing nothing is no longer an option.
The think tank also forecasts persistent inflation, with price growth averaging 3.5% this year and staying above target through to 2026, in part due to higher wages and Labour’s spending decisions in last year’s budget.
Interest rate cuts are expected to be delayed until early 2026, with the Bank of England projected to lower rates from 4.25% to 3.5%.
Professor Stephen Millard, Niesr’s deputy director, 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 – if she is to meet her own fiscal rules.”
Ms Reeves’ fiscal framework rests on two key tests: her “stability rule”, requiring everyday spending to be funded through tax revenue, and her “investment rule”, which aims to reduce debt as a share of GDP.
Shadow chancellor Sir Mel Stride said: “Experts are warning Labour’s economic mismanagement has blown a black hole in the nation’s finances.
“Rachel Reeves said she wouldn’t come back for more taxes – but she’s boxed herself in. Labour always reaches for tax hikes because they don’t understand how to grow the economy.”