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The UK chancellor must plug a £50 billion black hole in the nation’s public finances, with at least a 2p hike to the basic rate of income tax likely to be needed, a major economic think tank has warned. The National Institute of Economic & Social Research, Niesr, has further raised the spectre of tax increases at the upcoming November 26 Budget as it said it believes Rachel Reeves is on track to miss one of her fiscal rules by £38.2 billion in 2029-30. This is before the near-£10 billion required to rebuild the fiscal buffer that has been wiped out, according to the group. In it latest economic outlook, Niesr said it believes the UK’s independent fiscal watchdog, the Office for Budget Responsibility, OBR, will predict a smaller deficit of around £20 billion when its latest forecasts are published alongside the Budget. But Niesr is calling on the chancellor to aim for a buffer of at least £30 billion on top of this to help future-proof the finances against further shocks, which would still leave her needing to find £50 billion. It said the chancellor will likely need to break her manifesto pledge and increase income tax, rather than ‘messing around’ with changes to marginal taxes, which it argues would be more damaging to the economy in the long run. Niesr said a 2p rise on the 20% basic rate of income tax was expected to be the minimum needed to repair Britain’s battered public finances, raising around an extra £20 billion. A 5p rise on the 40% higher rate would add a further £10 billion, with around £500 million from a similar hike to the upper band, it added. This would impact economic growth knocking off around one percentage point on its forecast for next year to 1.1% in 2026, rising to a 0.3 percentage point hit in the third year. But it cautioned the alternatives were far worse, with a rise in VAT pushing up inflation as costs are passed on to consumers, while corporation tax hikes ‘discourages investment leading to permanently lower GDP’. And if credibility in the public finances is not restored, borrowing costs are set to remain high while debt will reach ‘unsustainable’ levels, Niesr said. Stephen Millard, deputy director for Macroeconomics, said Reeves would need to make ‘brave choices’. He said: ‘She will likely need to break her manifesto pledge by raising income tax rather than attempting to fill the gap by messing around with lots of changes to marginal taxes as this would be the least bad option for the economy. ‘A mixture of tax rises and spending cuts is needed to put the UK economy and public finances ’back on track’, which would in turn help the government to focus on its mission to deliver higher economic growth and better living standards across the country.’ Reeves had pledged not to raise taxes for working people in Labour’s general election manifesto widely interpreted to mean income tax, VAT, employee national insurance contributions, and corporation tax. She instead raised employers’ national insurance contributions, NICs, in last autumn’s budget and said at the time she said would not repeat such a tax-rising budget ‘ever again’. But she has already set the stage to renege on Labour’s manifesto pledge, refusing to rule out tax hikes in her pre-Budget speech on Tuesday and warning ‘each of us must do our bit’. David Aikman, a Niesr director, said: ‘The economics are clear; what is required now is political will the readiness to take difficult decisions on tax and spending in this Budget in the long-term interests of the UK economy.’ In its forecast, Niesr upgraded its growth outlook for 2025 to 1.5% from 1.3% in August, but kept its prediction for next year at 1.2%. It believes the Bank will hold interest rates at 4% this week, but will cut again in February as inflation is set to fall from 3.8% currently to 2.7% in the second quarter of next year. By Holly Williams, PA Business Editor Press Association: Finance source: PA Copyright 2025 Alliance News Ltd. All Rights Reserved.
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