UK Economy at Risk as Rachel Reeves Faces £60 Billion Shortfall

Chancellor Rachel Reeves’ ambitious fiscal policies could see her forced into raising taxes or cutting public spending by up to £60 billion before the next general election, according to leading economists. The National Institute for Economic and Social Research (NIESR) has criticised the government’s tax hikes for creating a precarious economic environment, warning that Reeves is on course to breach her own fiscal rules.

NIESR claims Reeves’ decision to increase the employers’ rate of National Insurance Contributions from 13.8 per cent to 15 per cent and to lower the salary threshold from £9,100 to £5,000 is harming business confidence, reducing investment and employment, and ultimately raising inflation. They argue that this tax increase could deliver less revenue than expected, with £10 billion anticipated to be lost as a result of slower economic growth.

The think tank further highlighted the significant risks posed by Reeves’ fiscal framework, stressing that her approach leaves little room for manoeuvre in the face of economic shocks. By relying on optimistic forecasts from the Office for Budget Responsibility, NIESR warned that the government’s projected growth figures could result in budget shortfalls nearing £62.9 billion by the end of the decade.

Analysts have drawn attention to the potential knock-on effects of these decisions. Businesses remain cautious about hiring and investment due to fears of further tax rises, ultimately weakening economic performance. Heightened geopolitical tensions and global trade disputes compound these risks, further eroding the fiscal headroom needed to stabilise the economy.

While Reeves and the Labour government have defended these measures as essential to “put public finances in order,” critics argue that the fiscal policies damage business confidence and fail to provide long-term solutions for sustainable growth. NIESR pointedly suggested that the UK’s economy remains in a “risky and vulnerable” position under the chancellor’s current trajectory.

Calls for a rethinking of the UK’s fiscal framework are growing louder. Labour MPs are now placing increased pressure on the Treasury to reset economic policies following recent local election outcomes. Critics warn that without meaningful intervention, Britain faces a prolonged stagnation marked by low growth, struggling public services, and further political divisions.

Reeves may find herself navigating a narrow path, balancing the need for sound public finances while addressing the broader economic consequences of her tax policies. As economists and business leaders issue warnings, the choices made in the coming months will be crucial to the future stability of the UK economy.