Reeves' taxes could keep interest rates high - report

Mortgage brokers face a winter of moving targets. A trio of warnings from retailers, economists and fiscal wonks suggests the Autumn Budget could usher in higher taxes and stickier inflation, extending the period of fragile demand and awkward pricing in housing finance. 

At issue is how the Chancellor plugs a sizeable fiscal hole without stoking prices. The British Retail Consortium (BRC) cautions that raising the business-rates burden on large stores would push up food costs and keep inflation north of 5 per cent well into 2026. KPMG, in its latest UK outlook, expects a long grind of revenue-raising measures over the decade as growth disappoints. And the Resolution Foundation has set out an explicit menu of tax switches aimed at raising billions with what it argues is less damage to work incentives. 

For those advising borrowers, the direction of travel matters as much as the headline rate moves. Food prices feed quickly into headline inflation, which in turn conditions rate-setters’ tolerance for easing and determines swap pricing along the curve. 

Retailers warn on rates — and food prices 

From April, a revaluation will link business-rates liabilities in England to 2024 property values, with a surcharge on properties above £500,000 to fund relief for smaller premises. That design has set hares running on the high street. 

Helen Dickinson, the BRC’s chief executive, has put the point starkly. Including larger shops in the new surtax would be the “biggest risk to food prices”. In her words: “This would effectively be robbing Peter to pay Paul, increasing costs on these businesses even further and forcing them to raise the prices paid by customers.” She adds: “The Government risks losing the battle against inflation and working families are understandably worried.” 

The backdrop is uncomfortable. Headline inflation stands at 3.8 per cent, almost double the Bank of England’s 2 per cent target, while food inflation is running hotter at 4.9 per cent — the highest since the cost-of-living crisis abated. The Bank’s decision last week to delay a rate cut reflected concern that grocery prices could re-accelerate. 

“The rate hold was in line with the market expectation amid sticky inflation and soft growth,” Gautam Pandey of Quantum Mortgages told Mortgage Introducer. 

Consumer behaviour is already adjusting. Boston Consulting Group research cited by the BRC points to cutbacks in discretionary spending and a lag between price rises and public perception. Among those planning to reduce food outlays this month, 43 per cent say they will simply buy less because prices have increased. For lenders, that points to household budgets under an additional squeeze just as fixed-rate deals written in 2022–23 continue to reset. 

KPMG: revenue over retrenchment 

KPMG’s UK Economic Outlook argues that the Chancellor, Rachel Reeves, is likely to favour tax rises over deep cuts in services in November. It trims growth projections to 1.2 per cent for 2025 and 1.1 per cent for 2026, citing weaker global trade, cautious consumers and policy uncertainty that is damping investment. 

“While the economy showed resilience at the start of the year, the second half looks more uncertain,” says Yael Selfin, KPMG UK’s chief economist. “Elevated tax burdens, weaker global trade and cautious consumers are likely to keep growth subdued into 2026. The government faces a tough balancing act. Mounting pressures on health and defence spending, combined with weaker growth, mean difficult fiscal choices ahead.” 

The sums are unlovely: a budget gap of £20–£50 billion is in play, despite roughly £40 billion of tax rises in October 2024. KPMG expects inflation to remain above target until late 2026, potentially touching 4 per cent in the autumn, with “domestic services inflation” proving stubborn as firms absorb higher costs — including Labour’s £25 billion national insurance increase. The consultancy diverges from some forecasters in expecting one more base-rate cut this year to 3.75 per cent, followed by two reductions in 2026, potentially to 3.25 per cent. 

“The forward guidance from the Bank is gradual and careful depending on the underlying data,” Pandey said. “Markets are expecting probably one cut in the near future.” 

Property taxation is very much on the table. Ministers are reported to be weighing reforms to Stamp Duty Land Tax (SDLT) — from replacing purchaser SDLT with a seller’s levy above £500,000, to allowing buyers to spread SDLT over several years. Any such shift would alter cashflow dynamics for movers and investors, with second-order effects on transaction volumes, new-build absorption and, ultimately, mortgage pipelines. 

Resolution Foundation’s ‘call of duties’ 

Into this fray steps the Resolution Foundation with proposals to raise more than £30 billion while “minimising the economic impact”. Its flagship switch would cut employees’ National Insurance by two percentage points and raise income tax rates by the same amount — broadening the base to pensioners, landlords and the self-employed while keeping take-home pay for workers broadly intact. The think-tank estimates a net £6 billion gain for the Exchequer. 

Adam Corlett, the Foundation’s principal economist, argues the trade-off is worth it: these reforms would “raise revenue while doing the least possible harm to workers and the wider economy,” and “by acting decisively, the Chancellor can turn her full attention back onto securing stronger economic growth.” He also calls for “ensuring that lawyers and landlords face the same tax rates as their clients and tenants.” 

The report canvasses further options: extending employers’ National Insurance to limited liability partnerships, increasing dividend taxes, and lowering the VAT registration threshold from £90,000 towards £30,000 to “stop small firms from bunching”, raising an estimated £2 billion. Additional levies on sugary and salty foods, long-haul flights, shipping and heavier vehicles would top up receipts. The Foundation concedes that tax alone may not restore fiscal “headroom”, echoing City cautions that spending control will still be judged by markets. 

What tax rises mean for mortgage professionals 

• Inflation path and pricing: If food inflation is propped up by retail tax changes, headline CPI could stay higher for longer, delaying a decisive pivot in the Bank’s guidance and keeping term swaps choppy. Build cushions into product pricing and be ready for short-notice rate reissues. 
• Affordability stress: Elevated food and services inflation erodes disposable income. Update expenditure models and broker guidance for clients nearing remortgage, particularly those rolling off sub-2 per cent fixes. 
• SDLT reform scenarios: A shift to a seller’s levy above £500,000 would reshape who bears transaction costs. Prime and upper-mid segments could see improved buyer affordability but potential seller resistance; cash-poor up-sizers may find chains easier to complete if purchaser SDLT is reduced or payable in instalments. Prepare scenario analyses for completions scheduled post-Budget. 
• Buy-to-let dynamics: Income-tax rises would bite landlords outside corporate wrappers; paired with stickier inflation and elevated running costs, stress-rate hurdles may remain tight. Consider communication on company-structure pros/cons and cashflow planning. 
• Arrears watchlist: Slower growth, a softening labour market and higher essential outgoings raise arrears risk into 2026. Tighten early-warning triggers (missed council-tax/utility payments, rising overdraft use) and expand forbearance playbooks. 
• Product strategy: If KPMG’s rate path materialises — shallow cuts to c.3.25 per cent by 2026 — long-end fixes may retain appeal for risk-averse borrowers, but flex options (portability, switch-and-fix features) could differentiate in a stop-start market. 

The Budget will not settle every question, but the contours are clear: more revenue rather than less spending, stubborn core pressures rather than a rapid disinflation, and a willingness to tinker with property taxes. For the mortgage trade, the prudent stance is to plan for prolonged uncertainty — and to keep clients a step ahead of the fiscal weather.