Market Highlights: A Record-Setting Day on Wall Street
November 12, 2024
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The UK economy is facing stormy waters under Chancellor Rachel Reeves, with growth slowing and fiscal pressures mounting. A leading think tank warns that slow growth and persistent inflation are jeopardizing Reeves’ budget plans and could force further tax hikes by this autumn. At the same time, Reeves is striving to adhere to strict fiscal rules – a task that is becoming increasingly difficult amid weak economic performance and policy uncertainty. Below we break down the current economic issues, what fiscal pressures the Chancellor is up against (including potential tax changes), and what it all means for investors.
The UK’s economic outlook has dimmed in 2025, with forecasts being downgraded as high inflation and stagnating growth take hold. The National Institute of Economic and Social Research (NIESR) projects just 1.2% GDP growth for 2025, down from 1.5% previously. Crucially, NIESR argues that many problems are “largely self-inflicted” by domestic policy choices rather than global headwinds.
For instance, British businesses are holding back investment due to the expectation of further tax rises, which is dampening confidence even more than external factors like global trade tensions. In fact, the prospect of new taxes this autumn is weighing on business decisions, leading firms to “wait and see” before committing to new projects or hiring. This policy uncertainty is creating a drag on growth, the precise opposite of what the government wants to achieve, as one economist notes.
Inflation also remains stubborn. NIESR now expects UK inflation to average around 3.3% in 2025, higher than earlier forecasts. This complicates the Bank of England’s job: while some interest rate cuts are anticipated, policymakers must be cautious if prices stay elevated. Overall, the economic backdrop is challenging, and much of it appears to be home-grown.
Rachel Reeves has tied her economic credibility to strict fiscal rules – namely, balancing day-to-day government spending by the end of the decade and reducing the national debt-to-GDP ratio within the five-year Parliament. However, these targets are increasingly at risk. According to fresh forecasts, the government is on track to miss its key fiscal rules, given the weaker growth and tax revenues.
In her Spring Statement, Chancellor Reeves had claimed the public finances were on course to maintain a £9.9 billion buffer by 2029–30. Now, NIESR says that cushion could flip into a £62.9 billion shortfall over the same period, if current trends persist. In plain terms, Britain may spend £63 billion more than it collects by 2030 – a fiscal gap that would breach the Chancellor’s rules and demand further action in the form of spending cuts or tax increases.
Why the sudden reversal? Slower economic growth means lower tax receipts than expected, eroding the Treasury’s headroom. Moreover, Reeves gave herself very little wiggle room to begin with. After the new government’s first budget, which included a large £40 billion tax increase (mostly on businesses), she was left with only about a £10 billion margin to meet her 2029/30 targets. That narrow headroom has now vanished due to the downgraded outlook.
Already in March, Reeves delivered a “tough budget” with spending cuts to welfare in order to meet her rules. Despite these measures, the fiscal arithmetic has worsened. The Office for Budget Responsibility signaled that without her spring cuts, Britain would have been on track for a deficit against her main rule. Now, facing a much bigger hole, the pressure is on for Reeves to find billions more. The independent Institute for Fiscal Studies (IFS) warned in late March that if the economic outlook deteriorates further, Reeves may have to reconsider her pledge not to raise taxes.
Both economists and political opponents are now speculating that further tax rises are likely in order for Reeves to fill the fiscal gap. The National Institute’s report bluntly stated that “the government is not going to meet either of its fiscal rules,” implying that tax increases later this year are increasingly likely. This expectation alone is already having real economic effects: companies are scaling back investment and hiring in anticipation of a heavier tax burden, essentially stalling growth in a self-fulfilling prophecy.
Even some of Reeves’ policy choices to date have drawn criticism for exacerbating the situation. For example, last year’s decision to sharply raise employer national insurance contributions – part of the record tax increase – has been blamed for denting economic growth this year. Forecasters say this move hit business confidence and hiring, contributing to the very growth shortfall that now imperils the budget.
The Chancellor’s self-imposed rules and limited headroom mean that, twice a year (at each budget update), she faces a hard choice: find spending cuts or announce politically unpalatable tax rises. As one economist put it, “the uncertainty created by this leads to low investment and lower growth, the precise reverse of what the government wants to achieve.”
So, what tax changes might we see if the Chancellor is indeed forced to “come back for more”? Here are six potential revenue-raising measures:
1. Lowering Income Tax Thresholds: Freezing or lowering tax-free allowances and brackets would quietly boost revenue by pulling more people into higher tax bands.
2. Hiking National Insurance Contributions (NICs): Increases for the self-employed or broadening the NIC base could bring in significant revenue.
3. Scrapping the Lifetime ISA (LISA): Ending the LISA program would save on government bonuses to young savers.
4. Reforming Pension Tax Relief: Capping relief at a flat rate (e.g., 20%) would reduce benefits for higher-rate taxpayers.
5. Increasing Taxes on Investments and Wealth: Raising CGT rates or tightening property taxes are on the table.
6. Broadening the VAT Base or New Levies: Extending VAT to more items or taxing bank reserves held at the Bank of England could raise funds.
Policy uncertainty presents both risks and opportunities for investors:
• Stay diversified across sectors and geographies to mitigate UK-specific risks.
• Use ISAs and pensions to shelter returns from potential tax hikes.
• Monitor fiscal events (like the Autumn Budget) for market-impacting changes.
• Avoid reactionary investing; instead, plan strategically with a long-term view.
• Navigating Uncertainty: The Value of Advice
In times of uncertainty, having a trusted adviser matters. At Zomi Wealth, we help our clients respond strategically to changes in policy and economic conditions. Whether you’re growing wealth, planning retirement, or managing a business, we’ll work with you to protect and optimise your finances.
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