* Budget gap may bring tough tax choices in UK

Budget gap may bring tough tax choices in UK —

By the time Chancellor Rachel Reeves stands at the dispatch box for the Autumn Budget on 26 November 2025, she will be delivering more than a routine fiscal update. The public finances picture confronting the new Labour government has hardened over the last year: borrowing and interest costs are higher than expected, independent forecasters are signalling weaker growth, and ministers acknowledge a sizeable “fiscal hole” that cannot be closed without politically awkward choices. That gap — variously estimated in recent coverage at between £20bn and £30bn — makes this budget one of the most consequential in a generation. (Financial Times)

Table of Contents

How the gap opened: weaker growth, higher borrowing, higher interest costs

Three broad forces have combined to pull a hole through the fiscal arithmetic Labour inherited and partly created:

Worse growth expectations. The Office for Budget Responsibility (OBR) — the UK’s independent fiscal forecaster — is widely reported to be preparing to downgrade its productivity and output forecasts in its next Economic and Fiscal Outlook. Each downward revision to long-run productivity reduces the tax base and therefore the structural revenue the government can reasonably count on. Treasury officials and multiple analysts say a relatively small downward tweak to long-term productivity growth (a few tenths of a percentage point) can be worth around £10bn of annual revenue, so a small downgrade multiplies into a big fiscal gap. (Office for Budget Responsibility)
Higher borrowing and debt service. Recent ONS data and OBR commentary show borrowing for the current financial year running materially above earlier profiles: borrowing in the first five months of 2025–26 was substantially higher than at the same point a year earlier, and monthly public borrowing has surprised to the upside. Higher headline borrowing increases the stock of government debt and — crucially — the cost of servicing that debt as bond yields have risen. Debt interest payments are now a major part of the budget arithmetic. (Office for Budget Responsibility)
Policy slippage and spending commitments. The government has already committed to increased departmental spending in the Spending Review 2025. Some welfare reforms and planned savings have proven politically or practically difficult to deliver at the pace the Treasury expected. Where promised cuts or reforms have been watered down or delayed, the hole must be filled elsewhere — by additional revenues or further cuts. (GOV.UK)

Taken together, those forces have produced the stark headline: the Treasury is working from an assumption that it needs to find tens of billions of pounds to keep to its fiscal targets unless growth improves materially. Independent commentators and the Treasury itself have repeatedly put the range at roughly £20bn–£30bn of corrective measures. (The Guardian)

The policy menu: where can money be found?

With a multi-billion gap, the government’s practical options fall into three buckets: (A) obvious headline tax rises; (B) stealth or structural tax changes; and (C) spending cuts or reprioritisation. Each has political and economic pros and cons.

A — Visible tax rises (income tax, National Insurance, VAT, corporation tax)

Income tax / NI — Raising rates, narrowing bands, or reversing recent cuts are the most visible ways to raise significant revenue quickly. Income tax increases are politically costly because they hit voters directly, but they raise money fast. The government has repeatedly said — and Labour’s manifesto pledged — not to raise the headline rates of income tax, VAT or National Insurance. However, ministers themselves are now signaling that “hard choices” may be necessary; ditching those manifesto commitments would be politically charged but would produce the largest single-policy haul if decided. (Financial Times)
VAT — Raising the standard VAT rate is blunt and regressive; it raises a lot of money quickly but risks squeezing household incomes and consumer demand. The government appears reluctant to go this route, and ministers have ruled out a new sales tax on private healthcare — showing the political sensitivity of some VAT extensions. (Reuters)
Corporation tax & business measures — Targeted increases on particular sectors (e.g., financial services, betting firms) or reversal of earlier business tax cuts can secure revenue while allowing the government to try to avoid broad-based measures that depress investment. Political messaging matters here: Labour wants to be seen as pro-growth even while needing cash. Business lobby groups are already warning that further rate rises or broadening will damage investment and hiring. (Reuters)

B — “Stealth” or structural options (threshold freezes, base broadening, targeted levies)

Tax base freezes — Freezing thresholds for income tax, NI, inheritance tax or capital gains treatment (so that inflation pushes more people into higher brackets) is a time-tested way to raise revenue without changing statutory rates. Economically, this is equivalent to a stealth tax rise and politically more palatable in the short term, but over time it becomes visible and unpopular.
New targeted levies — The Treasury may use sector-specific levies — betting, digital services, or green transition levies — that can be marketed as fairness measures. These tend to raise smaller amounts individually but add up. Some commentators expect “sin” taxes (on alcohol, gambling, sugar) or environmental taxes to be in scope. (S&W Navigating Complexity)
Clamping down on avoidance / closing loopholes — Tightening enforcement, changing tax reliefs (pension tax relief, entrepreneurs’ relief), or shifting the tax mix can raise revenue in the medium term, but such measures can be legally and administratively complex.

C — Spending choices (cuts, reprioritisation, efficiency savings)

Departmental budgets — Ministers insist the Spending Review set departmental settlements out to 2029–30; any further cuts would either be selective reductions or the deferral of capital projects. Cutting visible services (health, schools, police) would generate immediate political uproar.
Welfare reforms — Some of the government’s planned welfare reforms have already hit parliamentary obstacles. If reinstated and delivered at scale they can generate savings, but this is politically difficult and may not close the full gap. (Telegraph)
Efficiency & reform — The government can stress efficiency programmes, public sector reform, and improved procurement as medium-term measures — but these rarely add up to tens of billions on fast timelines.

The politics: manifesto promises, party management and business reaction

This is as much a political challenge as an economic one.

Manifests vs reality. Labour’s 2024 manifesto contained explicit promises not to raise income tax, VAT or national insurance. Breaking those commitments would be politically dangerous and open the party to charges of betrayal — but some senior figures now hint the manifesto was written before the full scale of the fiscal slippage became clear. Prime Minister Keir Starmer and Chancellor Rachel Reeves have begun to warn their own party and the public that difficult decisions lie ahead — a classic pre-emptive move to prepare the ground. (Financial Times)
Business & markets. Business organisations have already issued warnings that repeated tax hikes will damage investment and growth. Bond markets are sensitive: higher taxes could reduce growth and therefore revenue, while a failure to act risks higher borrowing and rising yields — a lose-lose if not carefully managed. The Chancellor must thread the needle: reassure markets that fiscal discipline will be restored while avoiding a policy mix that chokes the recovery businesses want to see. (Reuters)
Parliamentary arithmetic. Even with a working majority, Labour faces MPs from its own left and centre who are hostile to certain taxes (e.g., those hitting working households) or to cuts. That makes internally negotiated compromises and phased measures more likely than a single big, headline tax. Expect ring-fenced or compensatory measures for vulnerable groups if the Chancellor opts for stealthier, regressive options.

Economic trade-offs: growth, distribution and timing

Every option carries a macroeconomic consequence:

Timing matters. Tax rises implemented immediately have a different growth impact than those phased in over several years. The Chancellor will likely prefer back-loaded measures (phased or indexed to economic improvement), but markets will discount the timing.
Composition matters. Raising progressive taxes (higher rates on top earners, wealth taxes) is less damaging for consumption than VAT increases, but such taxes can bring legal and administrative challenges and raise questions about revenue yield predictability.
Credibility matters. The OBR’s forecasts and the Treasury’s engagement with independent scrutiny are a credibility anchor. Tinkering with the OBR’s remit or timing of forecasts to achieve a softer headline is politically combustible and could damage trust with markets and analysts; indeed, there are already reports of tensions between Treasury and the watchdog about forecasts. (Bloomberg)

What to expect in practice (most likely scenarios)

A mix of stealth and targeted taxes (most likely): The Chancellor opts for threshold freezes, targeted sector levies, and measures to shore up revenue without an immediate headline rate rise in income tax or VAT. Coupled with tighter enforcement and a small package of spending reprioritisations, this could plug a large part of the gap while limiting short-term political damage.
A partial retreat from manifesto commitments (possible): If the OBR’s downgrade is large and borrowing keeps surprising to the upside, the government may signal that certain manifesto pledges are unaffordable and shift to a package that includes an income tax tweak or modest NI reversal — framed as temporary or conditional on growth.
Bolder spending cuts (less likely politically): If politics or markets force a heavy consolidation, the government could combine tax measures with selective departmental cuts — but this risks alienating core supporters and the public.

Watch-points and flashpoints

OBR forecast release. The OBR’s Economic and Fiscal Outlook will be pivotal: a significant downgrade will raise pressure for immediate action. (Office for Budget Responsibility)
Business lobby response. The CBI, major banks and corporate groups will push back on measures seen to damage investment. Expect intense behind-the-scenes lobbying. (Reuters)
Union and grassroots reaction. If welfare reforms or public-service cuts form part of the consolidation, unions and activists will mobilise.
Market reaction. Government bond yields and the pound will react quickly to any perceived loss of fiscal credibility.

Conclusion: a tightrope budget

The Autumn Budget 2025 is shaping up not as a technocratic exercise but a political test of whether the new government can reconcile its social-investment ambitions with the harsh arithmetic of the public finances. The choices available are unsavoury: visible tax rises, stealth austerity via thresholds and freezes, or politically painful spending cuts. Whichever route Chancellor Reeves chooses will define the government’s economic compass for years — and will be judged both in Westminster and in the city by how credibly it restores a sustainable fiscal path without derailing growth.

For now, Labour is signalling realism and preparing the public for “hard choices.” But realism must be matched by a clear plan that balances fairness, growth and credibility; anything less risks a spiral of lost market confidence, political fallout and limited policy room to deliver the government’s broader ambitions. (Financial Times)

Case Studies & Examples

1. The October 2024 Budget (Rachel Reeves / Labour: plugging a £40bn gap)

What was done
When Labour came into power, they inherited large public finance pressures. The October 2024 Budget explicitly aimed to “plug a £40 billion spending gap” through a combination of tax rises and some spending measures. (The Conversation)
Key tax-raising measures included:
• Increasing employers’ National Insurance Contributions (NICs) from 13.8% to 15% from April 2025. (GOV.UK)
• Reducing the secondary threshold for employers’ NICs (i.e. lowering the earnings level at which employers start paying NICs on employee wages) from £9,100 to £5,000. (GOV.UK)
• Abolishing the non-dom tax regime (i.e. ending certain tax advantages for people residing in the UK but domiciled abroad), with reforms to inheritance tax, global income, etc. (CNBC)
Impacts and reactions
• It hit businesses with higher labour cost burdens (through employer NICs). Employers were concerned about rising wage bills, especially in sectors with many staff. (The Conversation)
• Some smaller employers got partial relief via changes to the Employment Allowance. But many still faced increased costs. (The Conversation)
• The government tried to maintain political pledges: the manifesto had promised not to raise income tax, VAT or employee NIC in many cases; so the package was structured to preserve some of those commitments (e.g. not touching personal income tax rates). (The Conversation)
Lessons
This is a good example of how a modern UK government balances revenue-raising with manifest political promises. It shows how “visible” measures (like rate increases) are risky, so governments often prefer measures that are less visible or that shift burdens (employer vs employee, high-earners vs general population). It also shows that even with a large tax package, political and business pushback is substantial, so design matters (who is affected, how gradually, what offsets or reliefs are provided).

2. Historical Example: March 1993 Budget (Norman Lamont / Conservative)

Context & Gap
After the 1992 election, the Conservative government faced large fiscal deficits. The economic outlook was weak; growth forecasts were falling; pressure from financial markets; and debt dynamics worrying. They needed to restore credibility and balance the books. (Belfast Telegraph)
What was done
The 1993 budget introduced large tax rises and some phased measures:
• VAT rises (including on domestic fuel), excise duties on alcohol, cigarettes, etc. (Wikipedia)
• Increases in various indirect taxes. Some measures were phased in over time to spread the burden. (Wikipedia)
Reactions and consequences
• There was strong opposition, especially from Labour, which accused the government of breaking promises. John Smith, then leader of the Opposition, called it “a shameful budget from a cynical government that has broken its election promises.” (Wikipedia)
• Some measures, particularly controversial ones (like VAT on household fuel), were politically difficult. For example, the planned further increase from the lower VAT rate to 17.5% was later blocked. (Wikipedia)
What happened afterwards
The fiscal tightening helped to restore some market confidence; the UK economy eventually stabilised. But politically, the measures were unpopular and had long term effects on trust. Also, those policy decisions set a precedent: in times of fiscal strain, governments tend to use VAT, excise duties, indirect taxes, and phased changes.

3. 2021 Budget under Rishi Sunak: Stealth tax rises post-pandemic

Context
The UK spending during and after Covid was very large, and the government needed to begin addressing deficits. Inflation was rising, and growth uncertain. There was pressure to raise revenue without sharply cutting popular services. (Institute for Fiscal Studies)
What was done
• Corporation tax was increased: from 19% to 25% starting in 2023. (Reddit)
• Freezing of income tax thresholds (so inflation would push people into higher tax brackets) — a typical “stealth tax”. (Reddit)
• Freezing inheritance tax, capital gains thresholds and other allowances. (Reddit)
Reaction & trade-offs
• Many commentators called these “stealth” because people often don’t immediately detect the effect until they get taxed more through bracket creep. Because no headline rate rises, political backlash is often less severe than outright rate increases.
• But for those affected (middle to higher earners, asset owners), these moves can be very real in terms of increased tax bills. Also, business sometimes complains of unpredictability.
• These measures raised revenue without breaking promises about rate increases, but they do have distributional consequences: pushing more people into higher effective tax rates without increasing nominal rates.

4. Recent Speculative / Proposed Measures (leading up to Autumn 2025 Budget)

As the “fiscal hole” has grown, various proposals, leaks, and comments indicate what kinds of tough choices are on the table. These show how both government and opponents are preparing. Some examples:
• Betting / gambling taxes: Chancellor Reeves has hinted at raising taxes on betting firms. Observers suggest this is one of the more politically acceptable revenue raisers since it hits “non-essential” consumption. (Financial Times)
• Property / wealth taxes: Including proposals of a mansion tax, changes to capital gains tax on homes above a threshold (e.g. homes over £1.5m), more uniform property taxation. These are often discussed because they target high-value assets and wealth (politically more defensible as “fairness” measures). (Indiatimes)
• Pension tax relief reform: One possible route is changing the rates of tax relief for higher earners, or reducing generous reliefs, to raise revenue. Again, sensitive, because many voters with pensions may be affected. (Indiatimes)
• Threshold freezes or narrowing tax bands: While not always explicitly announced, threshold freeze (income tax bands, personal allowance) is repeatedly mentioned in commentary/analysis as a relatively less visible way to raise revenue (through “fiscal drag”). Some ministers have not ruled that out. (Financial Times)
Political commitments & tension:
• The Labour manifesto explicitly had ruled out raising rates of VAT, National Insurance or income tax. But as leaks and statements show, government officials are signalling that those commitments may need to be revisited, or at least compromised upon, depending on the OBR’s forecasts and how big the fiscal gap turns out to be. (Financial Times)
• Ministers are trying to manage expectations — warnings that “there will have to be hard choices”. (Financial Times)

Comments & Trade-Offs from Experts

On fairness vs efficiency: Many tax experts argue that while raising revenue is essential, the design matters for both fairness and economic incentives. For example, relying heavily on indirect taxes (VAT, excise, etc.) tends to be regressive, hitting lower income households proportionally more. On the other hand, targeting wealth or property, or high income, shifts more burden to those better able to pay. But wealth taxes are harder to measure, administer, and sometimes avoid.
On business & investment effects: Businesses often warn that higher employer costs (e.g. employer NICs), or uncertainty about thresholds, reliefs, capital taxes, can reduce hiring, investment, or push costs through price rises. There’s a balancing act: generate revenue without damaging growth.
On political risk: If the public perceives someone is being unfairly taxed, or that cuts are hurting essential services, or that “promises” are being broken, there can be backlash, loss of trust. Manifesto promises are binding for many voters; breaking them can erode political capital.
On timing & credibility: Credible forecasts (from bodies like the OBR), transparent assessment of revenue yields and costs, phasing in measures, and safety nets (for vulnerable or modest-income households) help. Governments that acted without clear forecasts have sometimes suffered market or political punishment.
On “stealth” measures: These are often politically more manageable (threshold freezes, bracket creep, silent changes) but over time their effects become visible and can fuel resentment, especially among households who feel squeezed even if their nominal income hasn’t changed much.

What These Case Studies Suggest for Current / Future Tough Tax Choices

Putting together what’s been done previously, and what is being proposed, some likely insights / predictions:

Combination of approaches is almost certain: the current government will probably use a mix of visible tax increases, stealth measures, and perhaps cuts or reprioritisation in spending.
Targeted taxes on wealth / property / assets are politically more palatable when people believe they’re “fair” and aimed at those with capacity to pay. So expect proposals along those lines to feature heavily.
Employer NICs and business-facing levies are also likely, since they raise considerable revenue, though risk hurting jobs / investment or being criticized for increasing costs.
Threshold freezes are likely – they tend to be low-visibility but over time generate more tax revenue. But they carry political risk if people feel they are being dragged into higher tax bands with inflation.
Protecting low income households / working class voters will be a consideration. Likely offsetting or targeted reliefs may be used: e.g. preserving personal allowance, or perhaps increasing tax credits or support in some sectors.
Transparency and framing will matter: how the government frames “tax rises” will matter (fairness, shared burden, closing corporate loopholes, etc.), as will timing (phasing in, making some measures conditional on growth).