Dr Peter Spittal, Lecturer in Economics, provides commentary on Rachel Reeves’ 2025 Autumn budget and if it goes far enough to tackle the issues.
The UK’s public finances are in a fragile position. The small safety margin the Chancellor created in the Spring Budget has already been eaten away by cancelled spending cuts, higher borrowing costs and gloomy forecasts. Under the government’s own fiscal rules, today’s Budget needed to raise £20–30 billion through a combination of tax rises and spending cuts.
The measures announced are expected to raise £26 billion, offset by £3 billion in more generous child benefit plus other spending increases, which is at the lower end of what is needed. This means the margin for error is small: revenues could fall short, spending could be higher than planned, or growth could be slower than forecast. None of these outcomes would be surprising, so further tax rises or spending cuts are a real possibility in the years ahead.
Most government revenue comes from income tax, National Insurance and VAT, yet the Chancellor chose not to change the main rates of any of them. Instead, she relied on a set of smaller measures — such as increased tax on dividends and property, adding a mileage charge for electric cars and tightening ISA limits. These narrowly focused taxes can only raise limited sums, and they simply won’t be enough if the public finances weaken further.
Narrow taxes also change how people behave as people take actions to reduce the charge, often without any economic benefit. That wastes time and effort that could be used more productively, and it also reduces the revenue the government collects. Broader measures such as income tax, National Insurance and VAT can raise the same money with much smaller rate increases, giving people less reason to change what they do and so dragging less on productivity.
For all the effort spent avoiding an income tax rise, the measures that raise the most money still fall on workers. The two main policies in today’s announcement — expected to raise £12.7 billion, nearly half of the new revenue — are tighter limits on pension contributions made through salary sacrifice and a continued freeze on income tax bands. But pensions are simply deferred pay, so taxing contributions falls squarely on working people – leaving them worse off now or in retirement. And freezing tax bands works much like raising rates – as inflation lifts wages, more people are pulled into higher brackets and pay more tax – although, unlike a rate rise, a freeze leaves the final revenue take to inflation rather than to policy.
Given that the government has increased taxes on workers, it would have been better to do so transparently through small changes in the broad taxes we already rely on — income tax, National Insurance and VAT. These spread the burden widely, cause fewer distortions and are broadly progressive. They could also meet likely future revenue needs with relatively small rate adjustments. That would have been a simpler, fairer and more efficient approach than today’s piecemeal collection of measures.
More generally, the government has missed an opportunity for sorely needed more fundamental tax reform. The UK’s system is riddled with perverse incentives and inefficiencies — from stamp duty, which discourages people from moving for better jobs, to childcare rules that can leave families better off by earning less. These distortions reduce productivity and hold back growth. A government serious about improving long-term economic performance should be tackling these problems head on, not tinkering around the edges.
Photo by Alaur Rahman, www.pexels.com-5277952