Starmer refuses to exclude tax rate hikes of £5 billion as economists warn

Sir Keir Starmer refused to rule out further tax increases in the upcoming fall budget as leading economists warn Labour against a £50 billion shortfall before the end of the decade.

The Prime Minister said the government would focus on improving living standards but refused to confirm whether Labour would stick to its declaration that it would guarantee no increase in income tax, value added or corporate tax.

“The focus will be on living standards,” Starmer told the broadcaster during a visit to Milton Keynes. “In the fall, we will get a complete forecast and obviously we will have our budget… [but] At this stage, this will be listed in the budget. ”

The remarks come after a strict warning from the National Institute of Economic and Social Research (NIESR), which warned that Prime Minister Rachel Reeves would need to cut taxes every year between 2029/30 and 2029/30 to comply with Labor’s fiscal rules.

NIESR estimates that the £9.9 billion “buffer” Reeves received from his March budget has disappeared due to weak growth, inflationary pressures, welfare spending and an overexpected economic recovery.

“Filling the £50 billion hole is a huge commitment,” said Professor Stephen Millard, deputy director of NIESR. “We are looking at the basic income tax rate and the higher income tax rate increase by 5 percentage points.”

Although Millard clarified that the hike was not a suggestion, he said they illustrate the scale of the challenge the Prime Minister faced.

He described Reeves’ situation as an “impossible triple”: maintaining her fiscal rules, fulfilling Labour’s spending commitments, and maintaining tax lock-in commitments to avoid raising taxes on the “working people.”

Labor MPs and unions have called on Reeves to consider imposing a wealth tax or extending the freeze of the income tax threshold to more than 2028 to increase income – but neither option will raise any position needed for the £50 billion needed.

Culture Minister Lisa Nandy tried to downplay expectations for wealth taxes and told Sky News that the Prime Minister “swept cold water” saying Labour has inherited historically high tax levels and hopes to reduce the burden on working families.

Starmer insists that Labour’s economic management has made advances, including lowering four interest rates, wage growth and improvements to the minimum wage.

“We’ve stabilized the economy. That means that interest rates have been lowered four times now,” he said. “For anyone who watches this on a mortgage, it makes a huge difference.”

However, Sir Mel Stride, the shadow minister, accused the labor economy of badness, saying:

“The labor force will always reach tax leverage. Businesses are closing, unemployment is rising, inflation doubles, and the economy is shrinking. The labor force refuses to exclude a larger damage tax increase from investment.”

The government’s decision to not carry out planned welfare reforms increased public spending by £13.7 billion, while continuing winter fuel allowance contributed another £1.5 billion.

Compared to the Office of Budget Responsibility (OBR) forecast, NIESR has determined a shortage of £22.2 billion in output and employment, with an estimated expenditure difference of £14.3 billion, and a total of £51 billion by 2029/30.

Millard said that to maintain her fiscal “buffer”, Reeves may have no choice but to increase “medium but sustained” taxes unless a substantial reduction in spending is introduced.

Elsewhere in its outlook, NIESR upgraded its forecast for 2025 UK GDP slightly to 1.3% (from 1.2%), but lowered to 1.2% (from 1.5%) to 1.3% in 2026.

It also warned that inflation will remain stubborn, with an average of 3.5% in 2025 and 3% in 2026 well above the Bank of England’s 2% target, which will be due to the ongoing wage pressure and inflationary effects of the budget for the previous year.

Mortgage holders have some good news. NIESR expects the Bank of England to increase its interest rates twice this year, and by early 2026, the interest rate may drop to 3.5%. This week, the bank released its latest monetary policy report, the first cut this week.

A Treasury spokesman said the government remains focused on stimulating growth, believing that program reforms and investment incentives will improve long-term fiscal sustainability.

“The best way to strengthen public finance is through developing the economy – which is our focus. Due to our program reforms, OBR said the economy is expected to grow by the end of the decade.”

As Labor’s first full budget is under scrutiny and its tax commitments, the fall statement is now forming a certain moment for the government’s fiscal credibility.