'Sustained' tax rises are needed to close spending gap, says thinktank

Rachel Reeves will need to raise taxes to close a government spending gap that is on course to reach more than £40bn after a slowdown in economic growth and higher than expected inflation, according to a leading economic thinktank.

- Phillip Inman

In a blow to Labour's chances of balancing the books without breaking manifesto commitments ruling out personal tax rises, the National Institute of Economic and Social Research (NIESR) said a number of factors would blow a hole in the chancellor's plans to stay within spending limits. These included headwinds from Donald Trump's tariff war, higher debt interest payments and U-turns on welfare spending cuts.

NIESR said "moderate but sustained" tax rises would be needed in the autumn budget for Reeves to overcome a deficit of £41.2bn and then restore a near £10bn buffer in the current budget, forcing the Treasury to raise more than £51bn from taxes, secure extra borrowing or use severe cost cutting measures.

With extra borrowing likely to spook financial markets and ministers already struggling to stay within departmental spending limits, the thinktank said tax rises would be the most likely option.

A 5p rise in the basic and higher rates of income tax would fill the budget gap, NIESR said, though it recommended a broader review of tax rates and an overhaul of Reeves's budget rules to bring greater stability to the public finances.