Britain, in search of financial "breathing space" - Government must raise taxes to reduce budget deficit
Britain will have to raise taxes to cover a gap in government spending expected to reach more than 40 billion pounds, due to slowing economic growth and high inflation, the National Institute for Economic and Social Research said.
This is a serious blow to the Labour Party, which had hoped to balance the budget without breaking its election campaign promises, the basis of which was the exclusion of personal tax increases. According to the Institute, several factors, such as Donald Trump's tariff war and rising interest payments on the debt, will disrupt the government's plans to stay within spending limits.
The report specifies moderate but sustained tax increases in the autumn budget to tackle a deficit of £41.2 billion and restore around £10 billion to the current budget. This will force the Treasury to raise over £51 billion in taxes, secure additional borrowing or undertake stringent austerity measures.
Given that additional borrowing could unsettle financial markets and ministers are struggling to stay within spending limits for each department, raising taxes seems the most likely option.
The institute suggests that a 5% increase in income tax would close the budget gap, although they recommend a broader review of tax rates and budget reform to ensure greater financial stability.
Earlier, the finance minister warned that taxes would rise as the government lifted restrictions on social security payments, without specifying which sectors would be affected. Some Labour MPs are expected to oppose Reeves if campaign promises to reduce the deficit are scrapped.
The Bank of England is expected to cut borrowing costs from 4.25% to 3.75% by the end of the year, but this move will come too late to boost growth.
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