Reeves faces a tax gap of £30 billion ahead of the Budget announcement

Saturday 22 November 2025 12:35

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Rachel Reeves is set to plug a £30bn hole in the public finances with a “breakfast” of tax rises, according to new analysis.

The Institute of Economic Affairs warns that the gap will likely be addressed by combining broad-based income tax increases with smaller, targeted measures.

The gap, which has widened since the March 2025 forecast, is largely due to increased public spending and not economic shocks.

The £20 billion underfunding reflects a long-overdue decline in expected productivity, with the remainder due to government policy choices.

This includes scrapping the £5 billion welfare savings package and spending on favorable economic assumptions rather than putting it in the bank.

Possible measures include imposing national insurance on rental income, closing capital gains tax loopholes, raising council tax on expensive properties, tax on partnerships and raising the so-called ‘sin tax’ on gambling and sugary drinks.

Fiscal pull and burdensome measures

The Chancellor is also expected to extend the freeze on personal tax thresholds beyond 2028, raising an additional £8-10 billion through the fiscal hurdle, while other measures are likely to be delayed and come into force towards the end of the forecast period.

This approach aims to provide protection against future shocks, but risks further weakening consumer and business confidence in the short term.

The scale of the challenge is enormous, with borrowing reaching £17.4 billion in October, £3 billion more than the Office for Budget Responsibility (OBR) forecast, leaving Reeves’ condition £9.9 billion worse than projected in March.

Rising inflation has also driven up public sector wages, welfare spending and interest on debt, which is expected to exceed £100 billion annually for the rest of the decade.

Businesses and households were already on edge ahead of Wednesday’s announcement.

A recent survey of 400 employers showed 95 per cent of employers felt the government was failing to reward them for their hard work, while ONS data highlighted economic uncertainty as a key concern for companies.

Consumer confidence has also slumped, adding to pressure on the retail sector ahead of the holidays.

Political tensions are rising as Sir Keir Starmer refuses to rule out an income tax rise, despite Labour’s manifesto promise not to raise income tax, VAT or national uncertainty.

Recent analysis by AJ Bell shows a 1p rise in income tax would push the annual bill of someone earning £35,000 from £4,486 to £4,710.

With the Autumn Budget due on November 26, markets, businesses and households face a tense few days, and hope Reeves can provide clarity on the public finances, even if the solution is painful.