New report says Reeves will have to find the equivalent of a 5% income tax increase to make ends meet
Rachel Reeves, the Chancellor of the Exchequer, is under mounting pressure to unveil significant tax increases in the autumn Budget to avert a breach of her government’s own fiscal rules, following a bleak assessment from one of the UK's most respected economic institutions.
The National Institute of Economic and Social Research (NIESR) said in its latest quarterly outlook that a confluence of economic strains—stubbornly high inflation, slowing growth, and a retreat from previously announced welfare savings—will leave the government short by more than £40 billion by the end of the decade.
The independent research body forecasts that the UK’s current budget deficit will reach £41.2 billion by 2029–30, posing a serious challenge to Labour’s fiscal credibility. To restore the government’s £10 billion fiscal buffer, Reeves would need to raise £51.1 billion through higher taxes, spending restraint, or a mix of both.
Stephen Millard, deputy director for macroeconomics at NIESR, said: “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.”
In a thinly veiled critique of the Chancellor’s approach, NIESR has urged a departure from the rigid fiscal framework adopted earlier this year and called for a broader overhaul of the tax system—including reconsideration of long-standing property valuations underpinning council tax – possibly scrapping council tax and introducing a land value tax.
Labour’s manifesto pledged not to raise income tax, national insurance or VAT—constraints that now significantly narrow the Chancellor’s options. Nonetheless, NIESR suggests that a 5p increase to both the basic and higher rates of income tax could single-handedly resolve the deficit. The institute also estimates that simply freezing tax thresholds would yield an additional £8 billion annually, by pushing more earners into higher bands.
David Aikman, NIESR's director, said: “It will be crucial for the Chancellor to restore market confidence by demonstrating fiscal discipline. This will require a determined attempt to rebuild the fiscal buffer and that will inevitably involve gradual but sustained tax increases or spending cuts.”
For mortgage professionals, the risk of upward pressure on interest rates remains salient. Although NIESR expects the Bank of England to lower its base rate from 4.25% to 3.75% before year-end, the impact on mortgage pricing may be muted by fiscal policy shifts and continuing inflationary pressures.
The retreat from welfare cuts in early July—prompted by internal dissent within Labour’s own ranks—has already constrained the government’s capacity to trim expenditure further. Backbench MPs have signalled that any reversal of spending pledges, including those related to energy subsidies and housing, may face strong resistance.
Meanwhile, the Conservative opposition has seized on the deteriorating outlook. Mel Stride, a spokesperson for the party, accused the government of “always reaching for the tax rise lever because they don’t understand the economy.”
He added: “Businesses are closing, unemployment is up, inflation has doubled and the economy is shrinking. And Labour are refusing to rule out more damaging tax rises on investment.”
Further complicating matters, the macroeconomic environment is being reshaped by international developments. NIESR anticipates a 1.3% contraction in global output by the end of the decade due to surging U.S. tariffs, with implications for UK trade. The institute also noted that any competitive advantage from the UK’s marginally lower tariffs with the United States is unlikely to catalyse a meaningful relocation of manufacturing from the EU to Britain.
Although NIESR marginally revised its UK GDP forecast upward—from 1.2% to 1.3%—this modest growth will not be sufficient to counterbalance higher debt servicing costs or falling tax receipts.
For mortgage lenders and brokers, the broader concern will be the impact of government belt-tightening on household incomes, housing demand, and ultimately credit risk. With inflation still forecast to average 3.3% this year and the Bank of England’s 2% target not expected to be reached until 2028, affordability pressures may persist longer than previously anticipated.
