UK Chancellor Rachel Reeves has identified a £40 billion funding gap ahead of her upcoming Budget, exceeding earlier expectations as she plans significant tax increases to support the NHS. This figure reflects the funding required to safeguard key government departments from real-term spending cuts, address an annual overspend of £22 billion, and build a fiscal buffer for the remaining term of the parliament.
According to information provided to the Financial Times by officials involved in the Budget process, the Treasury is exploring methods to close the £40 billion shortfall, with tax increases likely to be a central strategy. The Chancellor might avoid such drastic measures if the independent Office for Budget Responsibility provides more positive economic forecasts before the Budget on October 30, as increased economic growth would mitigate the need for substantial tax hikes.
A Treasury spokesperson declined to comment on speculation regarding potential tax changes outside of fiscal events. As part of meeting a new “golden rule” to balance day-to-day expenditures with tax revenue, Reeves may have to raise taxes or identify savings, possibly through welfare cuts.
A government insider noted that Reeves is committed to allocating funds to the NHS, acknowledging that addressing the identified £22 billion fiscal gap would essentially maintain the current level of public services. Reeves’ Conservative predecessor, Jeremy Hunt, had left £8.9 billion of headroom in his fiscal rule, which mandates a reduction in debt as a GDP proportion in the fifth year of a forecast.
Reeves is expected to pursue a larger buffer against economic shocks given the early stage of the parliamentary term. She has expressed a preference for addressing significant tax decisions promptly, describing it as “wiping the slate clean.” On Tuesday, Reeves shared her Budget plans with cabinet colleagues and intended to present her final proposals to the OBR on Wednesday.
The Chancellor has been advising in recent weeks that “difficult decisions” would be necessary concerning tax, spending, and welfare. Addressing the cabinet, she emphasized the Budget’s focus on supporting working people, initiating NHS improvements, and rebuilding Britain. She acknowledged that reversing 14 years of issues would require more than a single Budget but aimed to initiate change.
The Institute for Fiscal Studies, a prominent think tank, mentioned that Reeves would need to generate £25 billion in tax revenue to align spending increases with overall economic growth, far exceeding current proposals. Labor must also fulfill election manifesto commitments while securing adequate funding through tax hikes or welfare reductions to support various Whitehall departments facing real-term budget cuts.
During a one-hour cabinet meeting on Tuesday, Reeves outlined her “challenging inheritance” and aspirations to secure additional NHS funding. An ally to the Chancellor remarked that any tax increases should target people’s priorities, with the NHS being the top priority.
Prime Minister Sir Keir Starmer, on Tuesday, did not rule out the potential increase in employer national insurance contributions, a business tax that could yield substantial revenue. According to officials, Reeves is also considering raising capital gains tax and implementing tax increases for “non-doms” and private equity executives.
Reeves informed the cabinet of the difficult economic situation but stressed that the budgetary decisions would be justified by the outcome. The goal is to stabilize the country’s finances and address the £22 billion deficit. This situation necessitates challenging decisions on spending, welfare, and taxation, with long-term resolution reliant on economic growth through investment.
The Chancellor is anticipated to use the Budget to redefine “debt,” providing more fiscal flexibility through borrowing for capital projects. She highlighted in discussions with the FT that her Budget will emphasize “invest, invest, invest.” Reeves also conveyed to her cabinet colleagues that the primary fiscal rule would be the “golden rule”: balancing current spending with tax receipts, an approach reminiscent of the fiscal strategy adopted by former Labour Chancellor Gordon Brown.