Rachel Reeves must hike taxes or break her own rules after ‘blowing budget black hole’
Rachel Reeves will have no choice but to introduce sustained tax hikes to paper over a deepening black hole in Britain’s finances, as her economic plans unravel, a think tank has warned. The National Institute of Economic and Social Research (Niesr) said a cocktail of poor economic performance, soaring borrowing, and her own U-turns on welfare reform have pushed the UK into a “worsening fiscal outlook”.
The Chancellor is now on course to miss her key “stability rule” by a massive £41.2billion by 2029-30, claims Niesr, putting her in what it calls an “impossible trilemma”: keep to her fiscal rules, deliver spending promises, or stick to her manifesto pledge not to raise taxes. She cannot do all three, it insists.
Chancellor Rachel Reeves (Image: Getty)
Unless she slashes spending or hikes taxes, the Chancellor will break her own rules, the think tank said – warning the moment of reckoning will come in the autumn budget.
This stark message lands despite a slight upgrade to the UK’s growth forecast. Niesr now expects GDP to grow 1.3% in 2025, up from its earlier 1.2% prediction in May. But its outlook for 2026 has worsened, with growth downgraded from 1.5% to 1.2%.
Niesr is urging the government to act decisively, calling for a “moderate but sustained” rise in taxes to rebuild a fiscal buffer, restore market confidence, and avoid higher borrowing costs.
The warning is particularly damaging given Labour’s public stance on tax. Ms Reeves has repeatedly said she has no plans to introduce major new tax rises, but Niesr makes clear that doing nothing is no longer an option.
The think tank also forecasts persistent inflation, with price growth averaging 3.5% this year and staying above target through to 2026, in part due to higher wages and Labour’s spending decisions in last year’s budget
Shadow Chancellor Mel Stride (Image: Getty)
Interest rate cuts are expected to be delayed until early 2026, with the Bank of England projected to lower rates from 4.25% to 3.5%.
Professor Stephen Millard, Niesr’s deputy director, said: “With growth at only 1.3% and inflation above target, things are not looking good for the Chancellor, who will need to either raise taxes or reduce spending – or both – if she is to meet her own fiscal rules.”
Ms Reeves’ fiscal framework rests on two key tests: her “stability rule”, requiring everyday spending to be funded through tax revenue, and her “investment rule”, which aims to reduce debt as a share of GDP.
Shadow chancellor Sir Mel Stride said: “Experts are warning Labour’s economic mismanagement has blown a black hole in the nation’s finances.
“Rachel Reeves said she wouldn’t come back for more taxes – but she’s boxed herself in. Labour always reaches for tax hikes because they don’t understand how to grow the economy.”
Nigel Farage issues 8-word statement after Reform trans row erupts
Reform UK leader Nigel Farage (Image: Getty)
Nigel Farage insisted he has “never supported men in women’s prisons” after Reform UK became engulfed in a trans row. The insurgent party’s new justice adviser spoke out against a blanket ban on trans women being imprisoned in women’s jails.
But her comments prompted criticism from gender critical campaigners including Harry Potter author JK Rowling. In a post on X today, Reform leader Mr Farage said: “I have never supported men in women’s prisons.”
The Clacton MP retweeted a video when he described the Supreme Court’s ruling in April that the legal definition of a woman is based on biological sex as a “victory for common sense”.
Former prison governor Vanessa Frake made the remarks as she was unveiled as Reform’s new justice tsar at a press conference on law and order yesterday.
She told The Times: “There are equally vile women as there possibly are trans women. So it’s all about the risk assessments for me, and each has to be done on an individual basis.”
When asked about the comments at the Reform press conference, Mr Farage said: “When it comes to trans women in prisons, isn’t it interesting that we run our country with people who become ministers who generally have no idea of the subject matter that they’re talking about.
“I’ve personally never worked in a prison so I can’t answer it but I think you’ll find the answer you get from somebody who has worked in prisons at the highest possible level is basically it’s about risk assessment.”
But Conservative leader Kemi Badenoch seized upon the comments as she insisted that the Tories are the “only party standing up for women-only space”.
She added: “After the Supreme Court judgment, we shouldn’t be hearing anymore about men being put in women’s prisons. Yet here we are. As usual, Reform have not done their homework and will make a big mess.”
Meanwhile, Rowling said: “Genuinely surprised anyone’s shocked by this. Just because huge swathes of the left have revealed themselves to be dripping in misogyny doesn’t mean a massive chunk of the right doesn’t remain exactly as indifferent to women’s rights and issues as it’s always been.”
It comes after the Supreme Court in April ruled that the terms “woman” and “sex” in the 2010 Equality Act “refer to a biological woman and biological sex”.
The decision has been interpreted to mean that transgender women can be excluded from women-only spaces such as toilets and changing rooms.
