Reeves Urged to Raise Taxes to Fill £41bn Budget Gap, Says Think Tank

 Reeves Urged to Raise Taxes to Fill £41bn Budget Gap, Says Think Tank

The National Institute of Economic and Social Research (NIESR) has warned that Chancellor Rachel Reeves may need to raise taxes this autumn to address a projected £41.2 billion shortfall in public finances. 

This gap threatens the government’s ability to meet its self-imposed fiscal rules, which include only borrowing for investment and reducing debt as a share of GDP within five years. NIESR suggests that a “moderate but sustained” increase in taxes is necessary, alongside reforms such as expanding VAT scope, adjusting pension allowances, and potentially freezing income tax thresholds beyond 2028. 

Despite Labour’s manifesto commitment not to raise income tax, VAT, or National Insurance for “working people,” economic challenges may force a policy shift. The think tank also recommended reforming or replacing council tax with a land value tax. A Treasury spokesperson maintained that economic growth is the best path to financial stability, but NIESR warned that growth alone won't close the gap.

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NIESR attributes the funding shortfall partly to sluggish economic growth and weakened tax revenues, but also to Labour’s reversal of earlier planned welfare cuts. Originally expected to save £5.5 billion annually by 2030, the softened reforms will now save significantly less. 

The think tank said Rachel Reeves faces a “trilemma”: fulfil spending commitments, keep tax promises, or meet borrowing limits highlighting that one may have to be sacrificed. Stephen Millard of NIESR argued that raising taxes is necessary, even if it breaks Labour’s tax pledge. Meanwhile, business sentiment is cautious. Rising employer National Insurance contributions are dampening investment, with companies like Domino’s Pizza reporting reduced profits and slowing expansion. 

Broader economic risks, including possible trade shocks from a future Trump presidency, add further uncertainty. NIESR forecasts modest UK growth of 1.3% in 2025 and 1.2% in 2026, and urges targeted policies to boost productivity and raise living standards especially for the poorest households, who remain below pre-Covid levels.