Rachel Reeves is staring down the barrel of a £57 billion budget black hole, with a leading economic think tank warning that Britain’s economy is “risky and vulnerable”.
The analysis piles pressure on the Chancellor ahead of the autumn Budget, with the National Institute of Economic and Social Research (NIESR) forecasting she will be forced to either raise taxes again or slash public spending to remain within her own “iron-clad” fiscal rules.
These rules require day-to-day spending to be balanced by 2029-30 and public debt to be falling by the end of the parliament.
The think tank projects Reeves will miss her main rule by £57 billion and fall short on the debt rule by £25 billion, unless there are major policy changes.
The NIESR said the Chancellor’s flagship £25 billion rise in employers’ National Insurance Contributions (NICs) has backfired because it has hammered business confidence, stalled investment, and may ultimately raise less tax than intended.
It highlighted three damaging effects: fewer jobs, higher prices, and ultimately, weaker tax revenues — with as much as £10 billion of the supposed revenue lost due to slower growth.
The NIESR concluded: “From an economic perspective, this is not a good tax to raise … This tax increase leaves the budget — and the UK economy as a whole — in a risky and vulnerable position.”
A Treasury spokesperson insisted the government remains committed to its fiscal rules and has “delivered a once in a parliament Budget to fix the public finances and rebuild the NHS”.
But experts warn that the rules are fuelling the very instability they aim to prevent. Stephen Millard, NIESR’s interim director, said: “The Chancellor’s self-imposed and arbitrary fiscal rules have led to a situation where twice a year she has to either find further departmental savings or announce politically unpalatable tax rises.
“The uncertainty created by this leads to low investment and lower growth — the precise reverse of what the government wants to achieve.”
NIESR forecasts GDP growth of just 1.2% this year, a downgrade from 1.5%, and held its 2025 projection at 1.5%. That’s despite the expected boost from lower interest rates, with the Bank of England tipped to cut rates to 4.25% today and possibly down to 3.5% next year.
Benjamin Caswell, NIESR senior economist, was blunt: “The only options are cutting back expenditure or raising taxes. Neither will be easy to do.”
He also warned that Reeves’ decision to maintain only £10 billion of fiscal headroom was a “mistake” that had chilled business sentiment. “Not rebuilding a larger buffer than £9.9 billion was a mistake because it has engendered uncertainty among businesses in the UK,” he said. “Company formation rates have collapsed.”
The consequences of Reeves’ approach are already being felt in the boardroom. According to NIESR, nearly a third of chief financial officers are now “significantly concerned” about further tax hikes — double the number from the end of last year. Businesses remain “cautious about investment and hiring”, it added.
A Treasury spokesperson said the government has an “iron clad” commitment to meeting its fiscal rules and had “delivered a once in a parliament Budget to fix the public finances and rebuild the NHS”, before “going faster and further for growth”.
