UK’s Fiscal Dilemma: Time to Raise the Tax Flag!
According to the National Institute of Economic and Social Research’s latest quarterly UK Economic Outlook, the government is set to miss its “stability rule” by a staggering £41.2 bn for the fiscal year 2029‑30. That means the Chancellor will likely have to patch up her budget with a hefty tax hike come Autumn, unless she can find a magical way to cheat the system.
What’s Behind the Numbers?
- Public‑sector borrowing has stepped up, putting more pressure on the Treasury.
- The reversal of welfare cuts—essentially giving money back to people—has added a new layer of cost.
- GDP growth has been lower than expected, so the economy isn’t firing on all cylinders.
In short, the Chancellor is stuck at a “plus‑minus” crossroads, trying to juggle three tricky goals: keep the fiscal rules happy, meet spending commitments, and avoid raising taxes (the bad news for any manifesto-bound politician).
Looking Ahead: Slow‑Mo Growth & Sticky Inflation
Projections are the kind of bland forecast you’d find in a textbook, but here’s the gist:
- GDP will grow at 1.3 % in 2025 and a slightly ticked‑down 1.2 % in 2026—placing the UK squarely in the middle of the G7.
- CPI inflation will hover around 3.5 % in 2025, dipping to about 3 % in Q2 2026. That’s above the Monetary Policy Committee’s target, thanks to wage inflation that keeps on ringing the bell.
- Added to that, the fiscal expansion announced in the Autumn 2024 Budget is doing its share of the inflation roller‑coaster.
How the Bank of England (BoE)’s Expected Moves Will Roll Out
Even with persistent inflation, the BoE is predicted to cut interest rates twice this year, and a third cut is flying into 2026. The goal? Lower the policy rate to 3.5 %, matching the “natural” nominal interest rate (r*).
Cost‑of‑Living: A Star‑bucks‑unavailable Reality
The cost‑of‑living crisis is still knocking on the door. The poorest 10 % of households in the UK have seen their living standards plummet:
- In 2024‑25 they slid by 1.3 % compared to 2023‑24.
- And their standards are roughly 10 % lower than before Covid.
It’s a sobering reminder that the “cushion” for people watching the price of bread rise is aging fast.
Cheering George the Chancellor: What the Government Could Do
Our tongue‑in‑cheek recommendations (but still practical, folks):
- Create a solid fiscal buffer by boosting taxes steadily—yes, that sounds dry but it can calm the bond markets and cut borrowing costs.
- <bShrink welfare spending by moving people quicker out of non‑work statuses. Think of the £1 bn earmarked for “pathways back to work” being fast‑tracked.
- <bRe‑think the Council Tax system—maybe swap the whole thing for a land value tax. Less gerrymandering, more fairness.
From Economic Scholars To Their Sassy One‑liners
Professor Stephen Millard (Deputy Director for Macroeconomics) states: “With growth at a low 1.3 % and inflation nudging above target, the Chancellor’s options are stark: raise taxes, slash spending, or tiptoe in between.”
Professor Adrian Pabst (Deputy Director for Public Policy) chimes in: “A guiding narrative would keep the ambitious policy programme on track. While the Comprehensive Spending Review had some bright spots, a tighter north‑south coordination with lower tiers of government is vital if the UK aims for fastest growth among the G7 and truly lifts living standards everywhere.”
