Taxes will be going up, but whose?
Rachel Reeves, Britain’s Chancellor of the Exchequer, stands at the precipice of a fiscal catastrophe, with a £50 billion shortfall in public finances threatening to upend her economic strategy.
The National Institute of Economic and Social Research (NIESR), a think tank co-founded by John Maynard Keynes, has issued a damning indictment of the Government’s economic strategy: a toxic brew of sluggish economic growth, a faltering jobs market, and spiraling welfare costs has plunged the government’s coffers deeper into the red. At a time when debt interest payments exceed £111 billion ($147 billion), the situation is increasingly unsustainable.
To restore just £9.9 billion of fiscal headroom and meet her self-imposed “iron-clad” fiscal rules, Reeves must conjure £51.1 billion through either tax hikes or spending cuts—a sum equivalent to a 5% increase in both basic (20%) and higher (40%) income tax rates.
This is not merely a budgetary hiccup; it is a profound failure of governance that imperils Britain’s economic stability and the well-being of its citizens. The UK’s generous (indeed, too generous—as President of France Emmanuel Macron recently pointed out) welfare state is dependent on a thriving economy. Yet for too long, Britain has traveled down the dark path of excessive government spending and anti-entrepreneurialism.
The irony is palpable. Just a year ago, Reeves excoriated the Conservatives for leaving behind a £22 billion black hole after 14 years in power, defending her own £40 billion tax raid as a “once in a generation” remedy to stabilize public finances.
Yet that raid has clearly proven inadequate. Business confidence has plummeted, unemployment is rising, and inflation is creeping upward. NIESR predicts that Reeves will overshoot her borrowing targets by £41.2 billion, a shortfall that dwarfs the Chancellor’s earlier criticisms of Tory profligacy, at nearly double what she lambasted her predecessors for.
The Chancellor’s options are a grim litany of economic poisons, each fraught with serious political and social costs. Freezing income tax thresholds would ensnare low-paid workers and pensioners in a stealth tax grab, further squeezing those already battered by the cost of living crisis.
So what are the options open to her, and how might they damage the country?
- Raising VAT would inflate living costs, disproportionately harming the poorest households—an act of political suicide given Labour’s working-class base.
- Increasing corporation tax, already a sore point after Reeves’s £25 billion raid on employers’ National Insurance, risks driving businesses abroad. As I previously wrote, we are already facing a wealth exodus like never before, so this would only imperil us further.
- Alternatively, a wealth tax—championed by Labour backbenchers like Richard Burgon and Jon Trickett—theoretically could raise £24 billion annually by levying 2% on assets over £10 million. This is, however, always a short-term measure, and would only discourage economic growth further.
These last two populist measures threaten Britain’s economic prosperity, alienating the wealth creators whose investments are vital for economic recovery. This would potentially trigger capital flight and undermine long-term growth, or prevent domestic businesses from growing. Why seek to increase your turnover, if it only results in a higher tax burden?
The human toll of these fiscal maneuvers is stark. HMRC data reveals that 2.6 million savers will face tax bills on their savings this year, up 120,000 from 2024, with an average liability of £2,300. This is because the Personal Savings Allowance—the amount savers can earn through interest tax-free—has been frozen since 2016, at £500 or £1,000 for the basic and higher rates respectively, even as interest rates have soared.
This tax on savings not only punishes the prudence of the average person, but also erodes the financial security of pensioners and low-income workers, who can ill afford additional burdens.
For businesses, the outlook is perhaps even bleaker. The £25 billion National Insurance hike has already sent business optimism to record lows—with fears that further tax increases could “fan the flames” of inflation, as Helen Dickinson, CEO of the British Retail Consortium, warns. Indeed, in December, the Institute of Directors reported that “business leader optimism in prospects for the UK economy” was at a shocking -61.
Internationally, the stakes are no less dire. NIESR’s Stephen Millard cautions that inaction could erode Britain’s credibility in global markets, and, in a world where capital is highly mobile, each new tax proposal signals that the UK is increasingly hostile to investment.
The problem is, in many ways, one of Reeves’s own making. Speaking to The Telegraph, David Aikman of NIESR frames the Chancellor’s dilemma as an “impossible trilemma”: meeting fiscal targets, honoring spending commitments, and sparing working people from further tax hikes. “Something will have to give,” he warns. The government’s reluctance to cut spending—evidenced by backbench rebellions in response to the modest proposal to trim our rocketing welfare bill—suggests that tax hikes are the path of least resistance.
The political fallout is already evident. Labour’s union backers and MPs like Rachael Maskell (who, incidentally, led the revolt against the welfare cuts) are pushing for a wealth tax, arguing that the doubling of billionaire wealth since 2010 justifies “redistribution.”
Yet, opposition leaders like Conservative MP Andrew Griffith warn that higher taxes will only deepen the cycle of low growth and higher levies. The government’s rhetoric, centered on economic growth through planning reforms, rings hollow against NIESR’s dire forecasts and the Office for Budget Responsibility’s (OBR) tepid projections.
For a government elected on promises of economic stability, this yawning £50 billion fiscal abyss represents a betrayal of trust. The British people, already groaning under high taxes, stagnant wages, and low productivity, deserve a government that prioritizes their prosperity over political expediency and populist appeal. As Reeves prepares for the Autumn Statement, she will have some expensive decisions to make.
