Reeves faces ‘impossible trilemma’ with fiscal rules

Chancellor must hike tax or borrow more to cover spending

- MILLIE COOKE, POLITICAL CORRESPONDENT

Rachel Reeves must raise taxes or tear up her flagship borrowing rules to fill a £41bn black hole left by Labour U-turns, higher borrowing and sluggish economic growth, top economists have warned.

The National Institute of Economic and Social Research (NIESR) - a leading economic think tank - said the chancellor could also look at spending cuts in the autumn Budget as a way to raise the money needed by 2029-30 to remedy a £41.2bn shortfall on her "stability rule".

Its report said the chancellor has been left with an “impossible trilemma” of trying to meet her fiscal rules while fulfilling spending commitments and upholding a manifesto pledge not to raise taxes on working people.

But after a swathe of spending cuts squeezing departmental budgets at the last spending review, tax rises are the more likely option. The chancellor is under increasing pressure to raise income tax or consider a wealth tax on the rich.

The think tank’s forecast warned that the poorest 10 per cent of people - amounting to 2.8 million households - have seen their living standards fall 1.3 per cent under Labour, some 10 per cent lower than pre-Covid levels.