Reeves faces £30bn tax gap ahead of Budget announcement

Rachel Reeves is set to plug a looming £30bn hole in the public finances with a “dog’s breakfast” of tax hikes, according to new analysis.

The Institute of Economic Affairs warns that the gap will likely be addressed by combining broad-based income tax rises with a patchwork of smaller, targeted measures.

The gap, which has widened since March 2025 forecasts, stems largely from spiralling public spending rather than economic shocks.

Roughly £20bn of the shortfall reflects a long-overdue downgrade in productivity forecasts, with the remainder resulting from government policy choices.

This includes scrapping a £5bn welfare savings package and spending favourable economic assumptions instead of banking them.

Potential moves include levying national insurance on rental income, closing capital gains tax loopholes, higher council tax on expensive properties, taxes on partnerships, and raising so-called ‘sin taxes’ on gambling and sugary drinks.

Fiscal drag and backloaded measures

The chancellor is also expected to extend the freeze on personal tax thresholds beyond 2028, raising an extra £8-10bn through fiscal drag, while other measures are likely to be backloaded, taking effect towards the end of the forecast period.

This approach aims to provide a buffer against future shocks but risks further undermining consumer and business confidence in the short term.

The scale of the challenge is huge, with borrowing hitting £17.4bn in October, £3bn higher than the Office for Budget Responsibility (OBR) forecast, leaving Reeves £9.9bn worse off than projected in March.

Rising inflation has also pushed up public sector pay, welfare spending, and debt interest, expected to exceed £100bn annually for the rest of the decade.

Businesses and households are already nervous ahead of Wednesday’s announcement.

A recent survey of 400 entrepreneurs shows 95 per cent of entrepreneurs feel the government fails to reward hard work, while ONS data highlights economic uncertainty as the top concern for firms.

Consumer confidence has also slumped, adding to pressures on the retail sector ahead of the festive season.

Political tension is growing as Sir Keir Starmer refuses to rule out income tax rises, despite Labour’s manifesto pledge not to increase income tax, VAT, or national unsurance.

Recent analysis by AJ Bell showed a 1p rise in income tax would push the annual bill for someone earning £35,000 from £4,486 to £4,710.

With the Autumn Budget on 26 November, markets, businesses, and households face a tense few days, hoping Reeves can bring clarity to the public finances, even if the remedies are painful.