Double-blow for Reeves
Chancellor Rachel Reeves is facing a tough job in her Autumn budget as government borrowing continues to rise while political promises over tax increases restrict how she can respond.
The Office for National Statistics has put August’s borrowing figure at £18 billion, putting the budget deficit for the financial year to date at £62 billion, £13.8 billion higher than the same time last year.
This was the highest level of borrowing in August for five years, when the country was still dealing with the fallout of the first pandemic lockdown.
“It is clear that further borrowing is not an option and with the UK currently suffering from a yield premium compared to the rest of the G7, the markets are demanding additional reward for providing funds to the government,” said Lindsay James, Investment Strategist at Quilter.
James noted that the government has a litany of fiscal pressures outside of the now-familiar low-growth environment it finds itself in
Productivity is likely to be downgraded when we get to the Budget, while higher and persistent inflation is pushing up index-linked costs.
“The UK economy, without a doub,t is bending, but likely will not break yet. However, the remedy will need to be harsh, something politicians on all sides appear reluctant to accept. Labour is likely to go down the route of raising more taxes, particularly on wealthier individuals.
“But the economic growth effects this has will not be positive. Meanwhile, this government has shown it is incapable of driving through necessary spending cuts, when in reality there needs to be a mix of the two.”
On the issue of taxes
While the Labour government has reiterated that tax increases are a last resort, Reeves faces a delicate balancing act as HMRC’s latest tax receipts arrive just months before the budget and highlight the fiscal bind facing the government.
Between April and August 2025, PAYE income tax and National Insurance contributions reached £197.0 billion, up £17.3 billion year-on-year.
With thresholds still frozen, more workers are being pulled into higher bands and businesses continue to bear rising employer NICs.
These measures have become the backbone of Treasury revenue, but the political reality is that Labour has ruled out increasing income tax, NICs or VAT for working people, says Shaun Moore, Tax and Financial Planning Expert at Quilter.
“That manifesto pledge leaves Rachel Reeves hemmed into a corner. With a £22 billion fiscal hole to fill and the most obvious levers off the table, attention inevitably shifts to other taxes.
“Inheritance tax is already on the rise, with receipts totalling £3.7 billion so far this year – £0.2 billion higher than the same period in 2024. Frozen thresholds, high property values, and the scheduled inclusion of pensions in 2027 mean IHT is set to grow further, making it a tempting, if controversial, source of additional revenue.”
Capital gains tax receipts also reflect this dynamic. Between April and August 2025, CGT brought in £922 million, compared with £852 million over the same period a year earlier.
The sharp reduction in the annual exempt amount from £12,300 to £3,000 has pulled far more people into scope, particularly landlords and second-home owners.
While receipts in this area are volatile, speculation around further reforms has fuelled debate about whether to accelerate sales, said Moore.
“The budget is shaping up to be a delicate balancing act between political promises and fiscal necessity. The temptation to tinker with IHT, CGT or property taxes is clear, but reform must be proportionate and predictable, or it risks damaging confidence and distorting behaviour in ways that ultimately reduce the Treasury’s tax take.”
