RE: Non dom flag ship policy reduced revenue8 Aug 2025 08:31
NIESR says a toxic mix of weaker economic growth, lower tax receipts, higher borrowing, and Labour’s failure to deliver the welfare savings it planned means the chancellor is now on track to break one of her own key fiscal rules.
That rule - the so-called “stability rule” - is Labour’s pledge to get the current budget into surplus by 2028/29. That means bringing in more through taxes and other income than it spends on public services and welfare
Back in March, the government’s official forecaster – the Office for Budget Responsibility – thought the chancellor would just hit that target, with £9.9 billion of headroom to spare, a very small margin. NIESR now thinks Rachel Reeves will miss it by £41.2 billion.
That’s not just a miss - it’s a very big hole.
NIESR’s assessment is particularly stark: it believes the chancellor may now need to find more than £50 billion just to restore the wiggle room she had five months ago.
Labour’s 2024 manifesto promised no tax rises for “working people” and no increases to National Insurance, or the basic, higher or additional rates of income tax or VAT.
That pledge is no longer sustainable.
Millard says the Chancellor now faces an “impossible trilemma”: rewrite the borrowing rules; cut public spending; or raise taxes.
Investors see the UK as a riskier bet and charge higher rates of interest than before, and departmental budgets have only just been set, making tax rises the only realistic option left.
“It is inevitable that Labour will have to raise one of the big taxes [income tax, national insurance, VAT] - and that will affect working people, in that sense, unfortunately, they will have to go back on the manifesto pledge.”
It estimates the chancellor could raise £8 billion a year by freezing the thresholds of income tax and national insurance beyond April 2028.
NIESR points out that raising £50 billion a year would require a 5 percentage point increase in both the basic and higher rates of income tax.