Economic Challenges Ahead
Rachel Reeves has to find more than 40 billion GBP in the autumn budget of tax increases or spending cuts to meet their household rules, warned a leading research institute. The National Institute of Economic and Social Research (NiesR) said that the government would miss its rule, which should cover these daily expenses in the 2029-30 financial year by tax revenue by GBP.
Fiscal Deficit and Pressure on the Chancellor
The deteriorating fiscal image was held responsible for bad economic growth, higher than expected borrowing and a reversal of the social cuts that the government could have saved 6.25 billion GBP. Together they created an "impossible trilemma", said Niesr, whereby the Chancellor at the same time is bound to their tax rules, spending obligations and manifest promises that oppose tax increases.
Possible Solutions
Niesr asked the government to build a larger tax buffer through moderate but persistent tax increases. "This will help to eliminate the fears of bond market from tax sustainability, which in turn can reduce the loan costs," it said. Money could be collected by reforms to the tax bands of the Council or in a more radical approach by replacing the entire tax system of the Council with land value tax.
Economic Growth and Inflation
The report was published against the background of poor growth, with the Chancellor fought after two months of decline in GDP to ignite the economy. The institute predicts a modest economic growth of 1.3% in 2025 and 1.2% in 2026. However, inflation should remain persistent, with the consumer price index (CPI) probably reached 3.5% in 2025 and around 3% by mid-2026.
Impact on Standard of Living
The persistent inflation also burdens the standard of living: the poorest 10% of British households recorded 1.3% by 1.3% compared to the previous year, said Niesr. They are now 10% worse than before pandemic. Professor Stephen Millard, deputy director of macroeconomics at NiesR, said that the government has difficult decisions ahead of them: "With growth of only 1.3% and inflation above the finish, things do not look good for the Chancellor who either increases taxes or reduced in October."
Interest Rates and Future Outlook
The Bank of England would reduce interest rates this year and again at the beginning of next year twice and take the interest rate from 4.25% to 3.5%. The conservative shadow chancellor blamed "Labor’s Economic Missmanagement" for the situation, while Niesr called for a greater focus on reducing economic inactivity, which could reduce welfare expenditure.
