To Tax, Or Not To Tax, That Is The Question: How Will The Government Tackle Its Budgetary Issues This Autumn?

Rachel Reeves is, to put it lightly, in a bit of a pickle over the UK’s finances. At the end of July, the Office for National Statistics (ONS) announced that UK government borrowing was £20.7 billion for June, more than three times the amount in June 2024. Then, to compound the problem, it was revealed at the beginning of August that the “£22 billion black hole” in government spending that Labour has used to justify its fiscal changes has now grown to £50 billion. It’s not a particularly big leap to deduce from these revelations that the country’s financial situation is worsening.

To add to this, the government was forced to back down on its recently proposed welfare cuts, which aimed to save £5 billion a year by the end of the decade, by its own MPs in June. Earlier that same month, another £750 million in spending cuts were reversed by the rebellion over winter fuel payment cuts. Backbench MPs don’t have the appetite to rebalance the country’s finances through spending cuts. 

For Reeves, the old expression of being stuck between a rock and a hard place springs to mind.

Now, as we start to approach the ‘Autumn Budget,’ it’s starting to feel like crunch time. The big question is what Labour is going to do.

Will there be tax rises? If so, which taxes? Will there be cost-cutting? Will Reeves relax her fiscal rules? 

These questions are currently unanswered, but it’s worth starting to examine the options at Reeves’s disposal.

Labour came into office on a platform of stability after years of Conservative turbulence. Reeves pledged “ironclad discipline” on her fiscal rules: day-to-day spending would be covered by tax revenues, and borrowing would be reserved for capital investment. The problem is that this framework is incompatible with reality. Inflation may have cooled, but debt interest payments remain stubbornly high thanks to interest rates staying above pre-pandemic norms, currently sitting at 4 per cent. At the same time, demands for spending are not abating. The NHS is still facing substantial backlogs, local councils are warning of insolvency, and commitments to increase spending on other areas, like raising defence spending to 2.5% of GDP from 2027, all require substantial cash funding. The gap between aspiration and reality is widening.

The most obvious way out for Reeves is taxation, but politically, this is treacherous ground. Labour has already ruled out raising income tax, National Insurance and VAT. This is the so-called triple lock on tax that Keir Starmer insisted on during the election campaign to avoid spooking middle-income voters. That leaves wealth-based taxation, such as reforms to capital gains and inheritance tax, pension tax relief and the possible introduction of a wealth tax. These measures could raise billions, but even bold changes would only chip away at the £50 billion hole. Furthermore, any move perceived as hostile to business or the middle-class risks denting confidence just as the UK edges out of stagnation.

If taxation is risky, spending cuts are even more perilous. Reeves has already seen how quickly opposition can mobilise when welfare spending is threatened, yet this would be the most obvious area for cuts, with social security making up a massive part of government spending, to the tune of over 22% in 2022-23. This is off the table. Other savings across departments could help, but after more than a decade of austerity, most departments have already trimmed obvious waste. New cuts would mean visible reductions in services, damaging Labour’s credibility and handing the opposition potent ammunition.

That leaves borrowing. Reeves could, in theory, relax her fiscal rules and argue that targeted borrowing today will fund investment that boosts growth tomorrow. The danger is that financial markets would interpret such a move as fiscal backsliding, a risk Reeves has worked hard to avoid since Liz Truss’s mini-budget debacle in 2022. Still, if borrowing is limited, temporary and tied to productive investment, she might be able to make the case without triggering market jitters. However, as already mentioned, a large part of the issue appears to be compounding borrowing costs, which are widening the gap between revenue and expenditure through a combination of substantial borrowings and high interest rates. Borrowing more money would be nothing more than a stopgap measure, serving only to kick the can down the road. 

So, what is likely? The most probable scenario is a blend: modest tax rises on wealth and capital, some restrained spending adjustments, and perhaps a small relaxation of the fiscal rules. Reeves will almost certainly frame any increases as a matter of fairness, asking those with “the broadest shoulders” to contribute more, while insisting that her approach will preserve stability and avoid the chaos of recent years. The political challenge will be timing and framing. Introducing tax rises too soon risks puncturing the government’s early popularity, especially among voters who swung to Labour for economic competence rather than ideological alignment. Yet holding off too long risks the opposite problem, a growing deficit that makes later adjustments far more painful and politically costly. 

On top of this, she must navigate competing pressures from within her party: the left pushing for higher spending on public services, centrist MPs urging caution to keep middle-class voters onside, and trade unions demanding wage settlements that could complicate the fiscal arithmetic and stretch resources ever thinner. Striking a balance that reassures the markets, satisfies the public, and holds her party together will require a degree of political dexterity rarely tested so early in a chancellor’s tenure.

Reeves’ task this autumn is not simply balancing the books: it is balancing political risk against economic necessity. If Reeves cannot convince both the public and the markets that she has a credible plan, Labour could easily find itself in dire straits within a matter of months.

Illustration by Will Allen/Europinion