The National Institute of Economic and Social Research (NIESR) has warned that Chancellor Rachel Reeves will need to hike taxes if she is to meet her self-imposed borrowing rules.
According to the think tank, the government was on track to miss the target it had set itself by £41.2 billion, which would require a moderate but sustained increase in taxes, including reform of the council tax system to make up the shortfall.
“The government is not on track to meet its ‘stability rule’, with our forecast suggesting a current deficit of £41.2 billion in the fiscal year 2029-30. Substantial adjustments in the Autumn Budget will be needed if the Chancellor is to remain compliant with her fiscal rules,” it said.
The economy is expected to recover
The NIESR’s data shows that the Chancellor should be supported by a recovering economy, and that inflation should fall gradually to target over the next three years, averaging 3.3% in 2025 and 2.8% in 2026.
Persistent but slowing wage growth from residual labour market tightness, along with the NLW uprating in April 2025, is expected to exert further upward pressure on prices over the coming months.
“We anticipate two more 25-basis-point rate cuts in 2025, followed by a further cut in 2026. Although an uncertain economic outlook may limit the Bank of England’s room for manoeuvre, we expect the MPC to continue its gradual easing, even with short-term upward pressure on prices this year,” it said.
Despite this recovery, the group warned that the living standards of the poorest 10% of UK households are falling.
“In 2024-25 they declined by 1.3%compared with 2023-24, and they are still some 10% lower than pre-Covid levels. We expect living standards to grow modestly in 2025-26 for middle- and high-income households but decline for the poorest 10%. For these households, higher-than-inflation increases in housing and food costs are likely to outstrip income growth,” it said.
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