The UK government won't admit it, but tax rises are coming — and there are no good options

People walk near the Elizabeth Tower, commonly referred to as Big Ben, near the Houses of Parliament in Westminster, central London on April 18, 2017.JUSTIN TALLIS | AFP | Getty ImagesThe U.K. government is loathe to admit it, but economists say it's highly ly that the Treasury will have to hike taxes in the fall if it is to bung a black hole in the public finances that it has effectively created for itself.The National Institute of Economic and Social Re (NIESR) is the economic think tank to warn that taxes would have to rise later this year if British Chancellor Rachel Reeves is to meet her self-imposed "fiscal rules."These rules target both a balanced or budget surplus by the end of the decade — with the so-called "stability rule" requiring that day-to-day spending is funded by tax revenues rather than borrowing — and that debt, as a portion of GDP, should be falling by the end of this parliament (in 2029-30), aka the "investment rule.""The Government is not on track to meet its 'stability rule', with our forecast suggesting a current deficit of £41.2 billion in the fiscal year 2029-30," NIESR said in an economic outlook released Wednesday."Substantial adjustments in the Autumn Budget will be needed if the Chancellor is to remain compliant with her fiscal rules," it added in the report.With the government having fixed its spending plans for the next couple of years in its recent Spending Review, "the only lever available is to raise taxation in a moderate but sustained way," the think tank said in the report titled "the Chancellor's Trilemma."The 'trilemma' refers to the bind Reeves finds herself in thanks to her own fiscal rules, tax and spending commitments made over the last year and the Labour Party's manifesto mise to not raise taxes on "working people.""Simply put, the Chancellor cannot simultaneously meet her fiscal rules, fulfil spending commitments, and uphold manifesto mises to avoid tax rises for working people

At least one of these will need to be dropped – she faces an impossible trilemma," NIESR said.Britain's Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves on June 23, 2025.Jacob King | Pool | Afp | Getty ImagesIt's worth noting that NIESR's forecast for the budget deficit could be even higher, at around £51.1 billion, if Reeves wants to keep around £9.9 billion's worth of fiscal "headroom" that the Treasury had planned for, but which has been slowly eroded after U-turns on welfare reforms and winter fuel payment cuts for pensioners."For the Chancellor to really shift the dial and build a reasonably sized buffer against her fiscal rules, she will have to look at either raising VAT or raising income taxes

VAT is the least distortionary tax but is also the most regressive

So, rises in income tax rates are ly to be the best answer, as we have previously argued," NIESR said, but added that there were few palatable options for the chancellor.No good options on tax risesBritish Prime Minister Keir Starmer was asked the NIESR report on Wednesday, and the suggestion that tax rises would be necessary, but said he did "not recognise" the figures

Nonetheless, he declined to rule out hiking VAT, income tax and corporation tax in the fall, Sky News reported."Some of the figures that are being put out are not figures that I recognise, but the budget won't be until later in the year, and that's why we'll have the forecast then and we'll set out our plans," he said.NIESR said Chancellor Reeves faces "unenviable decisions" for the Autumn Budget, when she will unveil taxation and spending plans for the year ahead."Unfortunately, the most politically acceptable choices for tax increases would either raise very little revenue or would have large distortionary effects, or both," the think tank said, suggesting some measures — such as extending income tax thresholds — would "particularly affect poorer households."Other measures, such as cutting the current £20,000 tax-free cash ISA allowance, or increasing the rate of capital gains tax, could disincentivize saving, the think tank warned.The government could also reverse cuts to employees' national insurance contributions (NICs) but "while this would generate significant revenue over the parliamentary term," it would again breach the manifesto pledge not to raise taxes on working people, and could have strong "distortionary effects via discouraging job creation and so would ly increase unemployment."A general view of people visiting the Trafalgar Tavern pub decorated with bunting and string lights on the bank of the River Thames in Greenwich on December 16, 2023 in London, United Kingdom

John Keeble | Getty Images News | Getty ImagesWhen Reeves announced her government budget last fall, she unveiled a £70 billion boost to public spending to be funded by higher borrowing and £40 billion in tax rises, which mostly hit British es.At the time, she insisted it was a one-off move, telling lawmakers that "we're not going to be coming back with more tax increases, or indeed more borrowing."Reeves could potentially adjust corporation tax rates and allowances which could also raise significant tax revenues, but this would run contrary to her previous pledge to cap corporation tax at 25% for the lifetime of the parliament.It would also ly have a negative effect on confidence, which has already taken a hit after a hike to employer NICs that took effect in April.