Britain's oldest independent economic institute tells chancellor to break election pledges
There’s been discussion of a mansion tax, capital gains increases on homes and even NI payments on rent for landlords – but now Rachel Reeves is facing growing pressure to abandon her pre-election pledge not to raise income tax, as Britain’s fiscal watchdog prepares to deliver a bleak assessment of the nation’s finances and economists warn that alternative revenue options would do deeper harm to growth.
The National Institute of Economic and Social Research (NIESR) has urged the Chancellor to raise income tax in next month’s Budget, arguing that other measures under consideration—ranging from wealth levies to corporate surcharges—would distort the economy more severely. The intervention comes as the Office for Budget Responsibility (OBR) readies a downgrade of its forecasts, leaving the Treasury to fill what could be a £30 billion hole in the public accounts.
Forecasts Darken, Fiscal Options Narrow
According to reports, the OBR’s draft analysis, now in the hands of Treasury officials, shows that Britain’s economic outlook is “significantly worse than assumed in March.” Lower productivity expectations, higher debt interest, and the scrapping of planned welfare savings have widened the gap Reeves must close if she is to meet her fiscal rules.
Read more: 'Hands off the housing market,' industry tells Rachel Reeves
“They are choosing this moment to make those revisions,” the Chancellor told The Times last week. “That’s a challenge for me. But I’m not going to duck that challenge. I will respond to it because it is important that I can give that confidence that we’ll continue to provide economic stability.”
Yet even as Reeves insists she will “not raise the rates of social security contributions, value added tax or income tax on working people,” analysts warn that those red lines may be unsustainable. City forecasters now regard tax increases at the November Budget as “all but inevitable”.
Think Tank Pushes for Difficult Choices
The NIESR, Britain’s oldest independent economic institute, has advised that of all the “undesirable or infeasible” options available, a modest increase in income tax would be the least disruptive.
“With none of these options being desirable or feasible, we would argue that the Chancellor will have to raise one of the main taxes: corporation tax, income tax, employee NICs or VAT,” the think tank said. While acknowledging that a higher income tax rate would dampen consumption and reduce incentives to work, it noted that only a one-percentage-point rise would be needed to generate the required revenue.
Read more: OBR to warn Reeves that economy is even worse than expected – reports
By contrast, an equivalent increase in VAT would cut household disposable income by nearly 3 per cent and trim GDP by almost 1 per cent, once inflation is taken into account.
NIESR dismissed other popular alternatives. A new wealth tax could shrink savings and investment, while a land-value levy—though economically efficient—would take years to design and implement.
Property Market in the Crosshairs
For the mortgage and housing sector, the OBR’s warnings and Treasury deliberations signal turbulence ahead. Reports suggest that officials are exploring a restructuring of Stamp Duty Land Tax, potentially replacing it with an annual property levy targeting homes valued above £500,000.
Read more: Reeves warned against piecemeal property tax changes
Such a system would shift the tax burden from the point of transaction to ownership itself, with payments based on property value and the length of tenure. The transition could create short-term urgency among buyers keen to complete before the rules change, but longer-term uncertainty in prime markets—particularly London and the South East, where higher-value properties would bear the greatest impact.
“Any threshold-based tax system risks deepening regional disparities,” one property lawyer warned, noting that households in affluent areas could face disproportionate liabilities.
Landlords and Lenders Brace for Impact
Reeves is also examining an 8 per cent National Insurance charge on rental income—an idea first floated by the Resolution Foundation. While politically easier than raising headline rates, the move would squeeze landlords’ net returns and could push rents higher.
Euan Stewart, of the Perth Mortgage Centre, said the proposals could hasten a shift towards larger, incorporated portfolios. “If these ideas come to fruition, I expect a shift towards more professional landlords, who can absorb the increased costs and associated admin,” he said.
Steve Cox, of Fleet Mortgages, added that many small landlords may opt to exit the sector altogether. “Possibly, some people will give up,” he said. “They’ll say, I can’t be bothered with this. It’s too complicated, too much hassle.”
Read more: NatWest chair tells Reeves to get radical with tax
For mortgage brokers, such behavioural shifts carry both risk and opportunity. A wave of remortgaging and portfolio restructuring could lift short-term business volumes, but the overall supply of buy-to-let transactions may contract, narrowing the pipeline of new lending into 2026.
A Budget of Limited Choices
Behind the political rhetoric, Reeves faces a narrowing path. With borrowing costs higher than expected and growth forecasts deteriorating, the Chancellor’s room for manoeuvre has all but vanished.
NIESR’s message is blunt: if the government refuses to countenance broader structural reform, one of the major tax rates must rise. For the housing market, which remains sensitive to even modest fiscal changes, the stakes are high.
Mortgage professionals, in particular, will be watching November’s Budget for clarity on timing and transition—knowing that, in a market already wary of rate volatility, uncertainty over tax could prove just as disruptive.
