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Starmer refuses to rule out tax hikes as economists warn of £50bn fiscal black hole

by August 6, 2025
August 6, 2025
Starmer refuses to rule out tax hikes as economists warn of £50bn fiscal black hole

Sir Keir Starmer has refused to rule out further tax increases in the upcoming autumn Budget, as leading economists warn Labour faces a £50 billion shortfall in the public finances by the end of the decade.

The Prime Minister said that the government would focus on improving living standards, but declined to confirm whether Labour will uphold its manifesto pledge not to raise income tax, VAT, or corporation tax.

“The focus will be living standards,” Starmer told broadcasters during a visit to Milton Keynes. “In the autumn, we’ll get the full forecast and obviously set out our budget… [but] at this stage, that will be set out in the Budget.”

The remarks came after a stark warning from the National Institute of Economic and Social Research (NIESR), which said Chancellor Rachel Reeves would need to find £51 billion annually in higher taxes or spending cuts by 2029/30 to comply with Labour’s fiscal rules.

NIESR estimates that Reeves’ £9.9 billion “buffer” from the March Budget has already disappeared, due to a combination of weaker growth, inflationary pressures, welfare spending, and slower-than-expected economic recovery.

“Filling a £50 billion hole is a huge undertaking,” said Professor Stephen Millard, deputy director of NIESR. “We’re looking at the equivalent of a five percentage point increase in both the basic and higher rates of income tax.”

Although Millard clarified that such hikes were not a recommendation, he said they illustrate the scale of the challenge now facing the Chancellor.

He described Reeves’ situation as an “impossible trilemma”: maintaining her fiscal rules, delivering Labour’s spending commitments, and keeping her tax lock promise to avoid raising taxes on “working people”.

Labour MPs and trade unions have called on Reeves to consider a wealth tax or extend the freeze on income tax thresholds beyond 2028 to increase revenue — but neither option would raise anywhere near the required £50 billion.

Culture Secretary Lisa Nandy sought to play down expectations of a wealth tax, telling Sky News that the Chancellor had “poured cold water” on the idea, saying Labour had inherited historically high tax levels and wanted to reduce the burden on working households.

Starmer insisted that Labour’s economic stewardship had delivered early progress, including four interest rate cuts, wage growth, and improvements to the minimum wage.

“We’ve stabilised the economy. That means interest rates have been cut now four times,” he said. “For anybody watching this on a mortgage, that makes a huge difference.”

However, Shadow Chancellor Sir Mel Stride accused Labour of economic mismanagement, saying:

“Labour will always reach for the tax-rise lever. Businesses are closing, unemployment is up, inflation has doubled, and the economy is shrinking. Labour are refusing to rule out more damaging tax rises on investment.”

NIESR said the government’s decision not to proceed with planned welfare reforms has added £13.7 billion to public spending, while continuing the winter fuel allowance contributes another £1.5 billion.

Compared to Office for Budget Responsibility (OBR) forecasts, NIESR identified a £22.2 billion shortfall in output and employment, along with a £14.3 billion discrepancy in projected expenditure, totalling a £51 billion difference by 2029/30.

To maintain her fiscal “buffer,” Reeves may have little choice but to make “moderate but sustained” tax increases, Millard said — unless significant spending reductions are introduced.

Elsewhere in its outlook, NIESR upgraded its 2025 UK GDP forecast slightly to 1.3% (from 1.2%) but downgraded 2026 to 1.2% (from 1.5%).

It also warned that inflation will remain stubbornly high, averaging 3.5% in 2025, and staying at 3% well into 2026 — above the Bank of England’s 2% target — due to persistent wage pressures and inflationary effects from the previous year’s Budget.

There was some good news for mortgage holders. NIESR expects the Bank of England to cut interest rates twice more this year, with rates potentially falling to 3.5% by early 2026. The first cut could come this week, when the Bank releases its latest Monetary Policy Report.

A Treasury spokesperson said the government remained focused on stimulating growth, arguing that planning reforms and investment incentives would improve long-term fiscal sustainability.

“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 the economy is expected to grow by the end of the decade.”

With Labour’s first full Budget under scrutiny and its tax pledges in doubt, the autumn statement is now shaping up to be a defining moment for the government’s fiscal credibility.

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Starmer refuses to rule out tax hikes as economists warn of £50bn fiscal black hole

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