Break Fiscal Rules or Increase Taxes in Autumn 2025 Budget?
Published / Last Updated on 04/04/2025
The World has changed according to Rachel Reeves and the UK’s position in it is ever changing.
That said, it appears Chancellor Rachel Reeves is not for changing given her reinforced message in the recent Spring Statement (mini-Budget) where sickness, illness and incapacity benefits were reduced but she stuck to her Fiscal rules of not borrowing more to fund public spending and not increasing taxes on working people (believe that if you wish???).
We suggest the World has changed and Mrs Reeves will be forced to change too.
- Recent calculations show that, and this is only after cuts to sickness benefits, that the UK will have fiscal ‘headroom’ this year of £10bn.
- This sounds a lot, but given public spending looks set to hit £1 trillion (that’s 1,000 billion pounds), so her 'headroom' (spare money) of just 1% gives her little room for error.
- Interest payable on UK government borrowing in February 2025 alone was around £7.4bn.
- This means she has ‘spare cash’ for the whole year of just 6 weeks of interest payments.
- This is the 3rd lowest level in 15 years and is only eclipsed by exceptional spending on Covid-19 and Lockdown.
Under Conservative leadership, by 2014 there was £80bn headroom, equating to around 9-10% of total government spending, up from £11-12bn under the previous Labour Government. We know the Conservatives are about austerity and limiting spending and Labour are about spending on public services, so there will always be differences, but this is tight. Rachel Reeves is taking a massive gamble if she sticks to her fiscal rules in Autumn 2025.
Geo-Political Risk
- Russia/Ukraine peace or no peace?
- Donald Trump’s tariffs of between 49% and 10% meaning higher prices in the shops, leading to stubborn inflation meaning higher interest rates for longer and therefore higher government interest payments.
- Retaliatory tariffs and global recession meaning lower corporate earnings and lower tax revenues.
- Donald Trump’s warning that Europe must spend on defence and not rely on the USA to defend it.
- Russian 'sabre rattling' at the UK and EU.
- UK Defence Budget 2024/25 is £55.6 bn. This is not quite 3% of GDP (NATO’s suggested measure) and to defend itself, we believe we need to spend nearer 5% of GDP, that’s around an extra £37bn more. In living memory, it was only Margaret Thatcher in the 1980s that hit 5% of GDP spend on defence.
The World Changing Means We Must Change
If we all agree ‘The World has changed’, then Rachel Reeves needs to change too. Being honest with the public is the best way to govern. Gambling on our services and defence to score political points is not strong government. There will be no government if we cannot defend ourselves or have a powerful deterrent.
Increase Income Taxes?
In Scotland, income tax rates are 19%, 20%, 42%, 45% and 48% yet for the rest of the UK, they are 20%, 40% and 45%. If 2% were added to income taxes across the UK, this would raise approximately £20bn in extra taxes per year in addition to the £8bn raised over the next 4 years by not increasing personal tax thresholds.
Wealth Tax?
Union Unite claims that a 1% wealth tax on wealth of more than £4m would raise £25bn per year.
Autumn Tax Rises?
Tax rises are coming in Autumn whether we like it or not. Mrs Reeves promised just one fiscal event each year and again it will be the Autumn Budget that delivers this.
We suggest some of the following are options for the Chancellor to raise taxes:
- Capital Gains tax changes to assets on death before inheritance tax is applied.
- Increase fringe taxes such as insurance premium tax.
- Reduce fringe allowances.
- Cut Cash ISA annual allowances and have a Lifetime Cash ISA allowance. It has already been done for pensions, so why not cash ISAs?
- Reduce pension tax relief incentives for higher rate taxpayers. It has already been done for 'buy to let' property finance/loan expenses being reduced to 20% relief for all, so why not simply stop higher rate tax relief on pensions?
Have Courage Mrs Reeves
It is time to be honest with the public. It is time to tell them that the World has changed, and Labour’s manifesto promises last year of not raising taxes for working people must sadly now change given the UK will not exist if we do not defend it. Labour has already allowed increased inheritance taxes (on pensions), removed stamp concessions, increased council taxes and cut winter fuel payments despite saying they wouldn’t for many, unpopular we know but necessary in these difficult times. It makes sense for income taxes to increase to at least to what Scotland is paying, and is no great leap given the public understand that without defence and without ‘headroom’ of more than £10bn, we are in serious trouble. Indeed without defence, our way of life could disintegrate anyway, and Labour would be forced out of power by default.
Labour needs to stop blaming the Conservatives and the alleged ‘black hole’, there was no black hole until Labour started increasing NHS spending, which we know was needed. The public are not fools, they know the good and the bad of the Conservatives and any government looks foolish by continually blaming predecessors and avoiding answering tough questions.
Either way, we need to spend more on defence and infrastructure. Mrs Reeves needs to break her fiscal rules or increase taxes on us all. Summer is the time to ‘prime’ the people for tax increases and Autumn is the time for action. Income tax rates at 22%, 42% and 47% are not going to break the people but they will help defend this nation and get social care and the NHS back on track.
We suggest honesty with the people will make Labour a credible government. ‘Ducking’ the issues and blaming others does not.
