UK QUARTERLY ECONOMIC OUTLOOK | Q3 2025
Fiscal
More taxes to come this autumn – and after?
A series of policy U-turns, higher Treasury gilt rates and a tougher economic outlook mean Chancellor Rachel Reeves will probably have to raise a little over £20bn at her next Autumn Budget to rebuild the £10bn headroom she had back in March.
The risk here is that, as the Chancellor seeks to ensure she meets her own fiscal rules and funds some giveaways, the tax hikes could end up being considerably bigger than expected. Either way, the long-term pressures on UK public finances mean that while this is Rachel Reeves’s only major fiscal event of the year, it’s highly unlikely to be the last tax-raising budget of this parliament.
The Chancellor’s £20bn+ challenge
The next Autumn Budget is still a fair way off and at the time of writing, the date has yet to be set. However, it currently looks like the Chancellor will have to raise over £20bn of extra revenue at the budget.
Collectively, the U-turns on winter fuel payments and benefits knocked about £7bn off the Chancellor’s £9.9bn headroom (see chart). The recent surge in gilt yields probably sliced off another £4bn. The likely downgrade in the Office for Budgetary Responsibility’s (OBR) growth forecasts and a potential downtick in its productivity estimates would cost her another £10bn.
Admittedly, much will depend on how the OBR revises its growth forecast, which is highly uncertain. But, the combination of Trump’s tariffs, a drag from tax rises and a slight increase in interest rates on government bonds makes it almost certain to be bad news.
What are Rachel Reeves’s tax-raising options?
How Rachel Reeves chooses to fill this hole could make a big difference to the economic outlook.
We’ll be publishing more detailed analysis closer to the Autumn Budget. But, there are two significant factors for the outlook as they relate to the broader economy.
First, is the timing of tax rises. The fiscal rules mean that the budget must be in balance by 2029–30, which leaves the Chancellor the option of pencilling in big tax rises later in this parliament. That would limit the impact on the economy next year, but would potentially be seen as unbelievable by the markets.
Second, the type of taxes being increased can make a difference. Tax rises are typically a drag on demand, which would, all else being equal, result in slower growth and lower inflation. This would give the BoE room to cut interest rates further. However, the Chancellor will want to avoid breaching the manifesto commitments to not increase taxes – namely, Income Tax, Value-Added Tax and National Insurance Contributions (NICs) – on “working people”. As a result, she might turn to another round of stagflationary taxes in 2026, such as duty or VAT increases, which both dampen demand and raise inflation. This could be enough to prevent the BoE from cutting interest rates further.
It's too early really to speculate on exactly which taxes might rise, but there are a couple of obvious steps Rachel Reeves could take to balance the books. Freezing income tax thresholds for another year and pencilling in a whole series of increases in “sin” taxes and duties for later this parliament seem likely. Indeed, a “salami slice” approach, where lots of taxes rise by a small amount, seems most likely at this point. Some reform on pensions or property taxes also looks possible.
If the Chancellor is still struggling to make the UK’s ends meet, then she can always resort to every chancellor’s favourite trick of scheduling unspecified spending cuts for 2029–30.
How risky are the Chancellor’s choices?
There are two big risks here. One is that financial markets react badly to the Autumn Budget. UK 10-year gilt yields have already risen by the most in the G7 over the last year, suggesting that markets are nervous about the fiscal outlook. Big promises on future tax rises or spending cuts that look difficult to achieve could push yields up even further.
Second, much larger tax rises could be coming. The Chancellor might sensibly want to increase the headroom she has from £10bn to maybe £20bn. The average headroom of previous chancellors was £25bn. This would stop endless speculation about further tax rises every time gilt yields rise, which has a damaging effect on consumer and business confidence.
In this case, it would mean tax increases of up to £30bn are not out of the question. However, raising £30bn without breaching the manifesto commitments would be a stretch. If she can hold off for another year, then she’ll be able to take advantage of a tweak to the fiscal rules allowing her to temporarily run a 0.5% deficit, which would give her another £17bn or so of headroom.
Ultimately, some degree of tax rises in the autumn looks inevitable. The bigger picture is that, given the public finances are in an unsustainable position, spending pressures are rising and with no sign yet of the promised pick up in productivity growth, a tax-raising budget may be a common occurrence.
