UK Chancellor Faces £51 Billion Fiscal Hole, May Break Labour's Tax Pledge

UK Chancellor Rachel Reeves faces a £51 billion fiscal hole to fill at the autumn budget, according to the National Institute of Economic and Social Research. This shortfall is due to slow growth, higher-than-expected borrowing, and U-turns on welfare spending plans. To restore the government's fiscal buffer, Reeves would need to implement tax hikes or spending cuts, which could imperil Labour's pledge not to raise taxes on working people. Filling the hole is equivalent to raising income tax by 5 percentage points.

UK Chancellor of the Exchequer Rachel Reeves is grappling with a £51 billion ($68 billion) fiscal hole to fill at the autumn budget, according to the National Institute of Economic and Social Research (NIESR). This significant shortfall is a result of slow economic growth, higher-than-expected borrowing, and U-turns on welfare spending plans.

The NIESR report, released on Wednesday, indicates that Reeves is on track to miss her rule to match day-to-day spending with tax revenue by £41 billion in 2029-30. To restore the government's fiscal buffer, which currently stands at just under £10 billion, Reeves would need to implement tax hikes or spending cuts amounting to more than £51 billion. This would be equivalent to raising the basic and higher rates of income tax by 5 percentage points [1].

The fiscal challenge is compounded by the need to maintain Labour's pledge not to raise major taxes on working people, specifically income tax, national insurance contributions, or value-added tax, which together account for around two-thirds of all revenue raised by the Treasury. Businesses are also still recovering from a £26 billion hike in payroll taxes in April.

Reeves faces pressure from both febrile bond markets, which are unlikely to tolerate more borrowing, and Labour lawmakers who recently rebelled over plans to curb welfare spending. The chancellor is considering extending freezes on tax thresholds and exploring more radical measures, including a wealth tax.

The NIESR predicts that UK gross domestic product will grow by 1.3% in 2025 and 1.2% in 2026. However, the think tank warns that tax rises in the autumn could weaken the economy. Stephen Millard, deputy director at NIESR, stated, "If the chancellor does take the sort of action required at her budget to bring her back into line with her fiscal rules, then that would have a growth impact. The potential for tax increases are in the risks, which is a big reason why we think the risks to GDP growth are to the downside."

Reeves will revise her fiscal plans at the autumn budget following a challenging spring and summer. Her headroom will also be eroded if the Office for Budget Responsibility downgrades its growth projections, aligning with more pessimistic private-sector forecasts.

References:
[1] https://www.bloomberg.com/news/articles/2025-08-05/reeves-has-a-51-billion-fiscal-hole-to-fill-uk-think-tank-says
[2] https://news.bloomberglaw.com/daily-tax-report/reeves-has-a-51-billion-fiscal-hole-to-fill-uk-think-tank-says