Chancellor Rachel Reeves is facing calls to raise tax revenue from middle class earners to plug the estimated £50billion black hole in the public finances by a leading think tank.
The National Institute of Economic and Social Research (NIESR) has projected that Ms Reeves will need to abandon Labour’s election commitment by implementing a minimum 2p increase to the basic income tax rate.
As the Treasury looks for ways to adhere to the Chancellor’s strict fiscal rules for November 26’s Budget, NIESR is sounding the alarm Labour may face a £20billion to £30billion black hole
The institute’s analysis reveals an additional £10billion will be required to establish essential fiscal buffers that have been depleted.
The Chancellor is under pressure over her tax decisions
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Whilst NIESR anticipates the Office for Budget Responsibility (OBR) will forecast a more modest £20 billion deficit in its forthcoming assessment, the think tank advocates for a £30billion cushion to safeguard against future economic turbulence.
Their recommendations specify a 2p increase to the 20 per cent basic rate would generate approximately £20billion in additional revenue.
A 5p rise to the 40 per cent higher rate could yield an extra £10billion, with the upper band contributing roughly £500million through comparable adjustments.
These proposed fiscal measures would dampen economic expansion, reducing growth projections for 2026 to 1.1 per cent from previous estimates, according to Niesr’s modelling.
Furthermore, the impact would persist into subsequent years, with a 0.3 percentage point reduction anticipated in the third year following implementation.
However, the institute warns that alternative revenue-raising options would inflict greater economic harm.
VAT increases would fuel inflation as businesses transfer costs to consumers, whilst higher corporation tax would “discourage investment leading to permanently lower GDP”, the think tank stated.
Without restoring confidence in public finances, borrowing costs would remain elevated and debt levels could become “unsustainable”, Niesr cautioned.
Stephen Millard, deputy director for Macroeconomics, emphasised that Ms Reeves would need to make “brave choices”.
He stated: “She will likely need to break her manifesto pledge by raising income tax rather than attempting to fill the gap by messing around with lots of changes to marginal taxes as this would be the least bad option for the economy
.”Labour’s election manifesto had promised to protect working people from tax increases, widely understood to encompass income tax, VAT, employee national insurance contributions, and corporation tax.
The Chancellor has already increased employers’ national insurance contributions in her previous budget, declaring she would not deliver such a tax-raising budget “ever again”.
Yet during Tuesday’s pre-Budget address, Ms Reeves declined to exclude future tax rises, warning that “each of us must do our bit”.
Shadow Chancellor Sir Mel Stride said: ‘NIESR’s warning is another reminder of the mess Rachel Reeves has created. Her choices are hurting Britain.’
NIESR director David Aikman claimed high UK debt, elevated borrowing costs and weak growth had left the Chancellor with a ‘large gap in the public finances’.
He explained: “This is the moment to start the process of bringing the debt ratio down.