Chancellor Rachel Reeves has confirmed she is examining “further measures on tax” ahead of next month’s Budget, providing the clearest signal yet that British taxpayers face another round of tax hikes just a year after Labour’s first Budget imposed £40bn of annual tax increases.
Speaking to broadcasters in Washington DC ahead of the International Monetary Fund annual meeting, Ms Reeves admitted the government was considering both tax rises and spending cuts to address a fiscal black hole estimated at between £20bn and £30bn. The Chancellor said she would “continue to prioritise economic and fiscal stability” whilst ensuring “the public finances always add up.”
The admission marks the first time Ms Reeves has publicly confirmed tax rises are on the cards for the 26 November Budget, following weeks of speculation about the deteriorating state of Britain’s finances. “As we get the forecast, and as we develop our plans, of course we are looking at further measures on tax and spending,” she told reporters.
Economic Pressures Mount on Chancellor
The Chancellor faces a perfect storm of economic challenges that have dramatically worsened her fiscal position since last year’s Budget. Rising borrowing costs, with yields on government debt at 27-year highs, combined with expected downgrades to UK productivity forecasts from the Office for Budget Responsibility, have created what analysts describe as an unavoidable need for fiscal tightening.
Ms Reeves revealed that the OBR had “consistently overestimated” Britain’s productivity growth, with the expected downgrade of previous assumptions likely to make her task even harder. The fiscal hole has been exacerbated by policy U-turns on welfare reforms and the scrapping of planned cuts to winter fuel payments following political pressure from Labour backbenchers.
In a separate interview with Sky News, the Chancellor blamed multiple factors for Britain’s economic woes, including the “severe and long-lasting” impact of Brexit, austerity policies, and former Prime Minister Liz Truss’s disastrous mini-budget in 2022. She cited the government’s attempts to strike food regulation and youth visa deals with the EU as moves that were “undoing some of that damage.”
Shadow Chancellor Warns of ‘Tax Doom Loop’
Shadow Chancellor Sir Mel Stride launched a fierce attack on the government’s economic management, accusing Ms Reeves of creating a “tax doom loop” through fiscal incompetence. “Be in no doubt, this tax doom loop is down to the Chancellor’s economic mismanagement,” Mr Stride said.
The Conservative frontbencher pointed to a litany of economic failures under Labour’s watch. Under Rachel Reeves we have seen inflation double, debt balloon, borrowing costs at a 27-year high, and taxes up – with more pain on the way in the autumn,” he stated.
Mr Stride argued the Chancellor should focus on controlling government spending, particularly the welfare bill, rather than repeatedly raising taxes. “Rachel Reeves doesn’t need to raise taxes. She needs to get a grip of government spending,” he said, suggesting that better management would eliminate the need for “more pain” for taxpayers.
Fiscal Rules Leave Little Room for Manoeuvre
Ms Reeves has boxed herself in with strict fiscal rules that she describes as “non-negotiable.” These require government debt to fall as a share of national income by 2029-30 and day-to-day government costs to be funded entirely by tax revenues rather than borrowing.
Asked directly whether she was now trapped in a “doom loop” of constant tax rises to fill recurring fiscal gaps, the Chancellor rejected the terminology but admitted: “Nobody wants that cycle to end more than I do.” She pointed to global challenges including geopolitical uncertainties, conflicts around the world, and increased trade barriers as factors complicating her task.
The Chancellor’s commitment to fiscal discipline comes after she witnessed first-hand the market turmoil that followed Liz Truss’s unfunded tax cuts. We saw just three years ago what happens when a government, where the Conservatives, lost control of the public finances – inflation and interest rates went through the roof,” Ms Reeves said.
Limited Options for Tax Increases
The Chancellor’s options for raising revenue are severely constrained by Labour’s 2024 manifesto pledges not to increase the biggest tax generators. The party promised not to raise income tax rates, VAT, corporation tax, or National Insurance for employees – though last autumn’s controversial rise in employer National Insurance contributions prompted accusations of breaking that pledge.
Reports suggest Ms Reeves is considering several alternative revenue-raising measures. These include continuing to freeze income tax thresholds beyond the current 2028 deadline, allowing fiscal drag to pull more people into higher tax bands as wages rise with inflation.
Property taxes are also under consideration, with potential changes to make more landlords pay National Insurance on rental income. The betting industry could face higher levies, with the Chancellor recently stating she thought “there is a case for gambling firms paying more.”
Capital gains tax and inheritance tax remain outside manifesto protections, with analysts from Morningstar suggesting a 10 percentage point increase in capital gains rates could generate £15bn, whilst freezing inheritance tax thresholds could raise an additional £5bn from higher-value estates.
IMF Forecasts Add to Economic Concerns
The Chancellor’s admission came as the International Monetary Fund delivered a mixed assessment of Britain’s economic prospects. Whilst the Fund predicted the UK would be the second-fastest growing G7 economy this year after the United States, with growth upgraded to 1.3%, it also forecast Britain would face the highest inflation rate among major economies in both 2025 and 2026.
The IMF trimmed its UK growth outlook for 2026 by the same margin it had raised the 2025 forecast, leaving medium-term growth prospects 0.4 percentage points weaker than projections made last autumn. This combination of persistent inflation and sluggish productivity growth creates a toxic mix for public finances.
The National Institute of Economic and Social Research has suggested Ms Reeves may need to find as much as £50bn annually by 2029-30 to meet her goal of balancing day-to-day spending with tax revenues whilst maintaining adequate headroom against her fiscal targets.
Spending Cuts Also on the Table
Significantly, Ms Reeves’ comments in Washington explicitly raised the prospect that tax rises could be accompanied by cuts to public spending, marking a potential shift from Labour’s previous stance. However, many Labour MPs believe spending cuts in most areas would be politically unviable after failed attempts at welfare reform earlier this year.
Government departments’ day-to-day budgets were only recently set for the next three years at June’s spending review, limiting immediate options for cuts. Any spending reductions would likely need to be promised for the period beyond the current spending envelope.
The Conservatives have drawn a clear dividing line on fiscal policy, pledging at their recent conference to slash public spending by £47bn annually if they win the next election through cuts to welfare, the civil service, and foreign aid budgets.
Political Fallout Intensifies
Ms Reeves had pledged at Labour conference last month to keep “taxes, inflation and interest rates as low as possible,” but her latest comments suggest that promise is already under severe strain. The Chancellor faces the politically damaging prospect of implementing tax rises for the second consecutive year after insisting last November’s £40bn tax increase would not need to be repeated.
The admission that both tax rises and spending cuts are being considered represents a significant moment for the Labour government, which came to power promising to revive economic growth and end what it called fourteen years of Conservative chaos. Instead, it faces accusations of economic mismanagement less than eighteen months into its term.
As Ms Reeves prepares to deliver her second Budget on 26 November, British taxpayers and businesses are bracing for another round of fiscal tightening. The Chancellor’s challenge will be to raise the necessary revenue whilst avoiding further damage to an economy already struggling with high inflation, elevated borrowing costs, and sluggish productivity growth.
The government’s economic credibility now rests on whether Ms Reeves can navigate these treacherous fiscal waters without triggering the kind of market turmoil that ended Liz Truss’s premiership or imposing tax rises that strangle the economic growth Labour promised to deliver.
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Image Credit:
Rachel Reeves — “Reeves speech 29 July 2024” by Zara Ferrar / HM Treasury under UK Open Government Licence v3.0
