There’s a quiet tension growing in the UK political landscape, and it has everything to do with taxes. While Prime Minister Keir Starmer and Chancellor Rachel Reeves remain tight-lipped, the writing’s on the wall: some form of tax increase may be on its way, and possibly sooner than the government would like to admit.
The latest nudge came from the National Institute of Economic and Social Research (NIESR), which released an economic outlook this week warning that the UK isn’t on track to meet its self-imposed fiscal rules without additional revenue. Simply put, the numbers aren’t adding up — and the Treasury may need to make difficult calls in the upcoming Autumn Budget.
Reeves, who has been clear about sticking to her fiscal rules, now finds herself in a tight spot. Those rules include reducing the national debt as a share of GDP by the end of the current parliament and ensuring day-to-day spending is fully funded by tax revenues, not borrowing. But NIESR’s projections suggest the government could face a deficit north of £41 billion by 2029-30, with potential for that number to creep closer to £51 billion depending on future spending shifts.
And here’s the rub: much of the government’s spending plan is already locked in. That leaves very little room to maneuver — except, of course, by increasing taxes.
The “Trilemma” Facing the Treasury
What Reeves is staring down has been called a “trilemma”: the impossible task of meeting fiscal rules, upholding Labour’s spending commitments, and sticking to its manifesto promise not to raise taxes on working people. At least one of those three, realistically, has to give.
VAT hikes? Possible, but regressive. Income tax increases? More equitable, perhaps, but politically dicey. Cutting tax-free allowances or raising capital gains? Technically viable, though it risks discouraging saving and investment. It’s a delicate balance — and none of the levers come without consequences.
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The idea of revisiting national insurance contributions (NICs) is also back on the table. It would bring in significant revenue, but again, it rubs against the party’s promise to avoid burdening average earners. Any such reversal could hurt job creation and stir further political backlash.
Silence from the Top
Starmer, when asked about the NIESR projections, stopped short of denying them outright — but also refused to confirm whether tax hikes are in the pipeline. “Some of the figures that are being put out are not figures that I recognise,” he said, adding that more clarity would come later in the year when the budget is formally unveiled.
It’s a line that buys time, but doesn’t shift the reality: the government will likely need more money to cover its plans, and there are few politically “safe” ways to raise it.
Where This Leaves Us
None of this is unusual, historically speaking. Governments often resist discussing tax increases until they absolutely have to. But what’s different this time is the scale of the challenge — and the narrowing options.
If Labour sticks to its fiscal goals, tough choices lie ahead. And while no official announcements have been made yet, the groundwork is being laid for what could be a defining economic moment for the Starmer administration.
