(qlmbusinessnews.com . Wed 6th Aug, 2025) London, UK —
UK Tax Increases Loom as Economic Growth Stalls, NIESR Advises Government Overhaul
Tax increases may be inevitable this autumn if Chancellor Rachel Reeves intends to adhere to her self-imposed fiscal rules, suggests an economic think tank. The National Institute of Economic and Social Research (Niesr) warns that the government is poised to fall short of its financial target by £41.2bn, advising a “moderate but sustained increase in taxes,” including a much-needed overhaul of the council tax system, to bridge the gap.
The Treasury remains optimistic, stating, “The best method to bolster public finances lies in stimulating economic growth.” Yet, the Conservatives critique Labour for habitually resorting to tax hikes.
Upon taking office, Chancellor Reeves instituted two cardinal borrowing guidelines: covering day-to-day expenses with government revenue, chiefly taxes, reserving borrowing strictly for investment, and ensuring public debt decreases in proportion to the national income within a five-year span. Reeves has firmly maintained these principles as “non-negotiable.”
Despite Reeves's initial promise to avoid further tax increases, recent disappointing economic growth figures have led her to leave the door open to potential hikes. According to Stephen Millard, Niesr's deputy director for macroeconomics, the Chancellor faces a tough choice in the upcoming October Budget: raise taxes, cut spending, or both to meet her fiscal objectives.
Niesr posits that tax increases could generate a financial “buffer,” stabilising the UK's fiscal outlook and potentially lowering borrowing costs. The think tank links the £41bn budgetary gap to dwindling growth, resulting in reduced tax revenue and increased government borrowing, alongside the dilution of initially planned welfare cuts—intended to save £5.5bn yearly by 2030—due to internal opposition within the Labour Party.
Chancellor Reeves now confronts a “trilemma”: fulfilling her spending promises, upholding her manifesto vow to prevent tax hikes on the working class, or staying within her borrowing limits. Niesr suggests that one of these commitments might have to be sacrificed but emphasises the importance of protecting public spending that aids the most vulnerable and maintaining public investment that fuels future growth.
Furthermore, Niesr urges the government to focus on policies that enhance growth and productivity, critical for raising living standards nationwide. It notes that the poorest 10% of the population currently lives at a standard 10% lower than pre-Covid levels.
Despite Labour's ambition to position the UK as the fastest-growing G7 nation, challenges including trade policy uncertainty, geopolitical risks, and domestic hurdles have hindered progress. Niesr anticipates modest economic growth for the UK, with estimates at 1.3% in 2025 and 1.2% in 2026, placing it in the middle of G7 economies.
While the International Monetary Fund (IMF) predicts the UK will be the third fastest growing economy among the world's most advanced economies this year and next, behind the US and Canada, Niesr projects inflation to persist at 3.5% this year and 3% the following year.
Niesr refrained from specifying which taxes should increase or by how much but suggested the government could also look at reducing welfare spending by accelerating efforts to transition benefit recipients into employment. The think tank also proposes considering a reform or replacement of council tax with a land value tax.
Responding to the report, a Treasury spokesperson reiterated the government's focus on economic growth as the path to stronger public finances. Meanwhile, shadow chancellor Sir Mel Stride criticizes Labour for economic mismanagement, predicting more tax increases despite Reeves's assurances to the contrary.
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