Prime Minister Keir Starmer has moved to temper speculation over potential tax hikes later this year, casting doubt on recent economic projections that suggest a significant public finance deficit.
Responding to analysis from the National Institute of Economic and Social Research (NIESR), Starmer expressed skepticism, saying: “Some of the figures being circulated aren’t ones I recognise.” The NIESR estimates suggest that the government could face a fiscal gap as large as £51 billion, driven by increased debt interest payments and policy reversals, particularly around welfare spending. These factors, the institute warned, could derail the chancellor’s attempts to remain within departmental spending limits.
NIESR’s deputy director for macroeconomics, Professor Stephen Millard, warned that “the outlook is not favourable” for Chancellor Rachel Reeves, who may be forced to choose between tax increases, spending cuts, or a combination of both to comply with the government’s fiscal rules during the autumn budget.
The think tank projected that to bridge a £41.2 billion deficit and rebuild a £10 billion budgetary buffer, moderate but consistent tax increases would be necessary—unless severe spending reductions were implemented instead.
During a visit to Milton Keynes, Starmer attempted to ease public concerns, reaffirming that the government’s primary objective is to improve citizens’ living standards. “We’ll set out our budget later in the year once we receive the official forecasts,” he said, reiterating that Labour’s strategy would be rooted in ensuring people “feel better off.”
He highlighted early progress, claiming Labour has already helped to stabilize the economy, citing four recent interest rate cuts and rising wages—both in the private sector and through an increased minimum wage. “This translates directly into more money in people’s pockets and lower monthly mortgage payments,” he said.
Despite growing concern over how Labour plans to balance the books while keeping its tax promises—including pledges not to raise income tax, VAT, or national insurance—Starmer avoided committing to specific measures. Instead, he emphasized a continued focus on affordability for working families.
The NIESR report has reignited speculation over possible alternative revenue-raising strategies. Some analysts suggest options could include prolonging the freeze on income tax thresholds or reducing the annual limit on tax-free ISA contributions. The possibility of introducing a wealth tax has also been floated, although senior Labour figures have moved quickly to dismiss the idea.
Culture Secretary Lisa Nandy definitively ruled out a wealth tax during an interview with Sky News. “The chancellor has been clear in rejecting that approach. Other countries have attempted similar measures with limited success. More importantly, we were elected at a time when working people are already facing the highest tax burden in decades,” she said.
As Labour continues to navigate a fragile economic landscape, the pressure mounts for clearer answers on how it will manage the nation’s finances without breaking campaign promises.
