Chancellor Rachel Reeves will need to come up with billions of pounds more to meet the government’s pre-election promises, according to calculations by influential think tank the Institute for Fiscal Studies (IFS).
The government has promised no return to “austerity” for public services and a boost to government investment, designed to kickstart growth.
But to honour those commitments the chancellor will need to “grasp the nettle” and come up with £16bn more on top of £9bn tax rises set out in the Labour manifesto, the IFS said.
The chancellor is finalising details of her first Budget, to be announced on 30 October.
Reeves will set out how she plans to meet a raft of manifesto promises against a tangle of self-imposed restrictions on borrowing, spending and debt.
It will be the government’s first big set-piece, an opportunity to set out its priorities and values, and to reset the political tone after a backlash over clothing and hospitality donations.
There is an expectation that more of the tax burden will fall on higher earners, following the government’s surprise decision to limit winter fuel payments to the poorest pensioners.
Some also hope for an end to the two-child limit for benefit payments.
But Reeves’ first Budget comes against a backdrop of higher debt following the pandemic, higher interest payments to finance that debt and inflation that has only recently returned to normal levels.
A growing and ageing population and the climate transition impose additional challenges.
The new government had inherited an “unenviable” situation with the public finances, the IFS said in its regular pre-Budget analysis of the public finances.
Growing pressures on health and pensions, combined with falling revenues from fuel and tobacco duties made the situation harder, but tough decisions were necessary, IFS director Paul Johnson said.
“If Ms Reeves does not grasp the nettle on 30 October, it could come back to sting her again before the next election,” Mr Johnson said.
There has been much debate over what taxes might be increased to cover the gap.
At the election Labour promised not to increase taxes on “working people”, and said it would not raise VAT (value added tax), income tax or National Insurance.
However, on Wednesday, Prime Minister Sir Keir Starmer did not rule out a possible increase in National Insurance contributions paid by employers, raising speculation this could be a Budget measure