Economist says tax rises not required for immediate fiscal remedy

Chancellor John Healey is not expected to raise taxes to provide immediate remedial action for the UK economy at the upcoming Budget, according to a leading City economist. Simon French, an economist at Panmure Liberum who previously worked at the Treasury, stated that the government’s fiscal outlook remains broadly consistent with its position at the start of 2026. In a note distributed to traders, French argued that the Chancellor remains constrained by Labour’s manifesto commitments and current fiscal rules, while the size of the available fiscal headroom is unlikely to have been severely impacted by the energy price shock resulting from the Iran war.

French noted that there is no clear evidence flagging a significant deterioration in fiscal headroom since March. Consequently, he concluded that immediate remedial action to retain the policy status quo is unlikely to be necessary. Several factors have contributed to a less pessimistic outlook for upcoming forecasts than previously anticipated. Growth has been modestly better than expected, and trends in net migration alongside unreliable labour market data could reduce the fiscal buffer by approximately £5bn. This buffer is currently set at £22.7bn by the Office for Budget Responsibility. Additionally, higher equity prices may partly offset the increased costs associated with a rise in gilt yields, which in turn pushes up projected government borrowing costs.

The analysis suggests that the economic outlook could be more positive than earlier estimates indicated. The OBR had warned earlier in the year that it had underestimated government borrowing levels following the 2022 energy price shock caused by Russia’s invasion of Ukraine, raising concerns that it might provide a bleaker forecast for UK public finances this time. Economists broadly agree that further trade disruption across the Strait of Hormuz, which could affect a fifth of the world’s oil and gas supply, poses a threat to the UK economy. Analysts at EY have suggested that if such disruption extends into the middle of next year, it could push the UK economy into recession.

Some optimism regarding a productivity pick-up has been highlighted by researchers at Morgan Stanley, who stated it has become more likely that the private sector is experiencing a longer-lasting upswing in output per hour. Academics at the London School of Economics, who have advised former Chancellor Rachel Reeves, have argued that annualised productivity growth is running at 1.6 per cent from the third quarter of 2024 to the present. However, French indicated that Healey is likely to push for sweeping changes, as this Budget will be the first under Andy Burnham’s premiership. Burnham’s ambitions reportedly extend beyond managing from one fiscal event to another. Publicly stated goals to raise defence spending to three per cent of GDP by 2030, increase the income tax personal allowance, and boost social care funding could cost an additional £39bn a year, according to Panmure Liberum.

French added that only specific measures, such as expanding national insurance to savings and investments, replacing the inheritance tax regime, lowering pension tax relief to a flat rate, or reforming property taxes, could deliver substantial tax receipt gains to credibly fund radical policies. He concluded that his base case is that this Budget will be rhetorically more radical than it is financially capable of being.