Sir Keir Starmer has dismissed economists’ stark warnings that Labour faces a £50 billion black hole in the public finances, as pressure mounts on Chancellor Rachel Reeves to break key manifesto pledges and raise taxes on working people.
The Prime Minister told broadcasters in Milton Keynes on Wednesday that he did not recognise “some of the figures that are being put out” after the National Institute of Economic and Social Research (NIESR) warned that Reeves would need to find £51 billion annually by 2029-30 to meet her fiscal rules.
Speaking during a visit to Milton Keynes, Sir Keir refused to explicitly rule out raising VAT, income tax or corporation tax in the autumn Budget, instead focusing on Labour’s achievements in stabilising the economy.
“In the autumn, we’ll get the full forecast and obviously set out our budget,” the PM said. “The focus will be living standards, so that we will build on what we’ve done in the first year of this Government.”
The Prime Minister highlighted that interest rates had been cut four times, providing relief to mortgage holders, and that wages had risen in both the private sector and through minimum wage increases.
However, Downing Street sources later scrambled to clarify that Labour remains committed to its manifesto pledges, which included a promise not to raise taxes on “working people”, including income tax and VAT.
The NIESR’s damning assessment reveals that the Chancellor’s “wafer thin” £9.9 billion fiscal buffer, announced in March, has been completely wiped out. The think tank now forecasts a budget deficit of £41.2 billion by 2029-30, creating a total funding gap of £51 billion when including the need to rebuild the fiscal cushion.
Professor Stephen Millard, NIESR’s deputy director for macroeconomics, delivered a blunt verdict: “Things are not looking good for the Chancellor, who will need to either raise taxes or reduce spending or both in the October budget if she is to meet her fiscal rules.”
The scale of potential tax increases required has shocked Westminster. NIESR calculated that bridging the fiscal gap would require an unprecedented five percentage point rise in both basic and higher income tax rates, though the think tank stopped short of recommending such drastic action.
“Fiddling at the edges is not going to do the job,” Professor Millard warned. “If she is going to raise £50 billion, that requires large increases in taxes.”
The economist highlighted Labour’s lack of preparation upon entering government: “The really disappointing thing from my point of view was that when they came in, there didn’t seem to be a plan on the table. A lot of the problems the Chancellor is facing could have been almost headed off if they had come with a clear plan.”
Reeves faces what NIESR describes as an “impossible trilemma” – trying to meet her fiscal rules, fulfil spending commitments, and maintain Labour’s manifesto pledge not to raise taxes on working people.
The Chancellor has set herself two “non-negotiable” fiscal rules: the “stability rule”, ensuring day-to-day spending is matched by tax revenues so the Government only borrows to invest, and the “investment rule”, requiring the Government to reduce net financial debt as a share of the economy.
Conservative shadow chancellor Sir Mel Stride seized on the findings, declaring: “Experts are warning Labour’s economic mismanagement has blown a black hole in the nation’s finances which will have to be filled with more tax rises – despite Rachel Reeves saying she wouldn’t be back for more taxes.
Labour will always reach for the tax-rise lever because they don’t understand the economy,” Sir Mel added. Businesses are closing, unemployment is up, inflation has doubled and the economy is shrinking.
Despite announcing tax rises worth £40 billion in last year’s Budget, Ms Reeves has repeatedly refused to rule out a fresh raid this autumn, fuelling speculation about where the axe might fall.
Labour MPs and unions have urged the Chancellor to impose a wealth tax to balance the books, whilst freezing income tax bands for longer could also be on the cards. NIESR estimates that extending the current freeze on tax thresholds beyond 2028 would generate approximately £8.2 billion through fiscal drag.
Culture Secretary Lisa Nandy attempted to dampen speculation about a wealth tax, telling Sky News: “The Chancellor has very much poured cold water on that idea, partly because many countries have tried this sort of approach, but mostly because we were elected as a Government in a time when taxes on working people were at their highest rate for generations.
“We want to bring taxes down for people, we want to help support them, put money back into people’s pockets,” Ms Nandy insisted.
The fiscal crisis has been exacerbated by several factors, including the Government’s failure to pass planned welfare reforms, adding £13.7 billion in spending, and the continuation of winter fuel allowances, costing an additional £1.5 billion.
NIESR’s analysis also revealed that weaker growth in output and employment compared with Office for Budget Responsibility forecasts accounts for a £22.2 billion difference in 2028-29, whilst there is a £14.3 billion gap between the OBR’s March forecast for total expenditure and NIESR’s projections.
In a rare bright spot for the Government, NIESR nudged up its economic growth forecast for the UK to 1.3 per cent for 2025, up from 1.2 per cent forecast in May. However, it cut its prediction for 2026 to 1.2 per cent, down from 1.5 per cent previously expected.
The think tank also expects Consumer Price Index inflation to remain stubbornly above the Bank of England’s 2 per cent target at around 3.5 per cent this year, falling to 3 per cent in the second quarter of 2026, mainly due to persistently high wage inflation and the inflationary effects of measures announced in last year’s autumn Budget.
For mortgage holders, NIESR expects the Bank of England to cut interest rates twice more this year, bringing the base rate to 3.5 per cent by the beginning of 2026. The first of the 0.25 per cent cuts could come as early as Thursday, when the Bank publishes its latest monetary policy report.
Professor Millard said he believed it was “inevitable that Labour will have to raise one of the big taxes – and that will affect working people. In that sense, unfortunately, I think they will have to go back on the manifesto pledge.”
A Treasury spokesman responded: “The best way to strengthen public finances is by growing the economy – which is our focus. Thanks to our planning reforms, the OBR has said that the economy is expected to grow by the end of the decade.”
As speculation mounts about the autumn Budget, businesses and households across Britain face an anxious wait to discover where the inevitable tax burden will fall in Labour’s desperate bid to balance the books.
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Image Credit:
This is a government-commissioned photograph used in cropped form:
- Keir Starmer official portrait (3×4 cropped) – Description: Prime Minister Sir Keir Starmer Official Portrait (3×4 cropped).jpg, taken on 5 July 2024 at 13:51:31, in London, UK, by Simon Dawson / No 10 Downing Street. Licensed under the UK Open Government Licence v3.0 (OGL 3.0); Crown copyright held by the UK government
