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Responsibility for the UK’s sluggish growth prospects should lie squarely with Rachel Reeves’ fiscal policy, Britain’s oldest independent economics research institute has said, as it warned tax rises left the economy in a “risky and vulnerable position.”
A report by the National Institute of Economic and Social Research pinned the economic uncertainty harming business confidence on the Treasury’s “narrow” fiscal headroom, pouring cold water on the notion that Donald Trump’s erratic tariff policy was to blame.
“While tariffs and global trade uncertainty have undoubtedly dampened sentiments, they are unlikely to be the primary drivers of lacklustre UK economic performance this year,” NIESR said.
“Instead, underlying cost pressures and subdued confidence, shaped by domestic policy and an uncertain fiscal outlook, are playing a more dominant role.”
The NIESR report said Reeves was on track to break her £9.9bn fiscal rules, with the economy growing slower than expected amid rising costs and a slowdown in domestic demand. It added that the hikes to National Insurance Contributions sparked a slowdown in hiring, eroding corporation tax receipts from slimmer business profits, which the report’s authors claim now “presents a large risk to the government.”
‘Endless speculation’
“Endless speculation about the size of the government’s fiscal head room is entirely self-inflicted. It is the result of arbitrary fiscal rules that have served the country poorly,” the report said.
NIESR senior economist Ben Caswell said the government’s “wafer thin” £9.9bn fiscal headroom, and the fact that sudden changes had to be made in the Spring Statement to stay within target, has led to businesses putting off investment decisions on the expectation that further tax hikes were on the way.
He told City AM: “If you’re making these adjustments every six months, everyone is just waiting until the next six months until you give them more clarity.”
“A lot of businesses are thinking, “in the Autumn Budget in 2025 are we going to have a repeat of the Spring Statement? Is she going to fall short again? Is she going to have to raise taxes? Am I going to get hit again?””
“The true root of the problem is that the UK has issues in its own domestic economy. We can’t just pivot and place the blame on Trump.”
Shadow Chancellor, Mel Stride told City AM: “The Chancellor is playing fast and loose with the public finances. She should have learned lessons after she was forced into an emergency budget in March. Now she is once again teetering on the edge of breaking her own fiscal rules.
“This inevitably means rising speculation about further painful tax rises come the autumn – all at a time when businesses are in desperate need of certainty, and households are worried about rising bills.”
The Treasury has been approached for comment.
