Rising taxes are a logical approach to resolving the Chancellor's three-pronged challenge

The UK Government finds itself in a challenging position as it faces the prospect of not meeting its "stability rule". This predicament is due, in part, to the potential need for the Chancellor to break a manifesto pledge by raising taxes.

As of 2025, the identity of the Chancellor is not explicitly known, but the Prime Minister is Keir Starmer, with cabinet reshuffles involving ministers such as Rachel Reeves and David Lammy. The specific individual holding the position of Chancellor, however, remains undisclosed.

The UK's economic forecast for 2025 and 2026 paints a picture of anaemic growth, with the GDP expected to grow by 1.3% in 2025 and 1.2% in 2026. Inflation, meanwhile, is projected to remain high, at 3.3% in 2025 and 2.8% in 2026, eroding pay packets and keeping rents and mortgage costs high.

The Chancellor is faced with a fiscal bind, unable to meet all three main promises: obeying fiscal rules, honoring existing spending commitments, and avoiding tax rises for working people. This predicament, often referred to as the "fiscal trilemma", is a complex challenge that requires careful navigation.

One solution proposed is to safeguard public investment in infrastructure and skills, and the protection of basic services that underpin social cohesion. Fiscal honesty is also emphasised as the surest way to restore confidence in the markets, economy, and politics.

However, this approach may not be enough to bridge the growing deficit. By 2029-30, the current deficit in the UK is forecasted to be £41.2 billion. To address this, spending cuts, if unavoidable, should fall where they do least harm to future growth and to the most vulnerable households.

Gradual but sustained tax rises are also unavoidable, with an increase in income tax being part of the package. Further interest rate cuts by the Bank of England are less certain than previously expected, adding to the fiscal pressure.

The Autumn Budget will be a moment of truth for the Chancellor. If she continues to pretend that all three corners of the trilemma can be met, she risks a crisis-driven choice later. The Bank of England's target for inflation is not being met, and the Spending Review settlement caps departmental budgets until 2029, limiting the Chancellor's room for maneuver.

The poorest 10% of households are expected to face another year of falling living standards, with public services potentially facing visible damage due to further spending cuts. Rebuilding fiscal resilience is a priority, requiring a much wider buffer than the £10 billion headroom left by the Chancellor in March.

In conclusion, the UK's economic situation presents a complex challenge for the Chancellor. Navigating the fiscal trilemma requires a delicate balance between fiscal rules, spending commitments, and tax policies. The Autumn Budget will be a critical moment in determining the UK's economic future.