Rachel Reeves’s budget 2025: The IfG’s six things to look out for

Just over a year ago, Rachel Reeves' first budget announced a large tax rise and increase in public borrowing to pay for higher day-to-day and investment spending. That was supposed to be a ‘one and done’ tax rise. But it has become increasingly clear in recent months that further tax rises are likely. What will the new forecasts look like? What exactly will Reeves announce? And what factors will shape the chancellor’s choices?

Will the government change its fiscal strategy?

Since the Labour government took office last year, chancellor Rachel Reeves has stressed the importance of complying with her “iron clad” fiscal rules to maintain the fiscal stability needed for economic growth.

But she has retained only a very small buffer against her rules, meeting the current budget deficit target by just £9.9bn in her first budget and again in this year’s spring statement. This has left her at the mercy of economic conditions over which she has little control. When the economic outlook deteriorated in the spring and again more recently, Reeves has been forced to find tax rises and spending cuts to make the numbers add up. As a result, her ‘iron clad’ commitment to fiscal sustainability has translated into policy instability rather than the stability she craved.

This policy instability has been exacerbated by a lack of clearly stated objectives from the government for the tax system, as described below. As a result, when worsening economic forecasts have prompted debate about the need for tax rises to fill the gap, those outside government have had little idea about what tax policies might – or might not – be in the mix. 

Will Reeves use her second budget to create a larger buffer against her fiscal rules to ensure she is less vulnerable to events and, if she does, what combination of measures does she use – tax rises, reductions in day-to-day public service spending, investment or welfare? The figure below shows the mix of spending and tax measures, and changes to borrowing that the government has announced since taking power – albeit much of the welfare spending cuts is expected to be reversed. How will the mix of measures from Reeves differ this time?

So how will the mix of measures from Reeves differ this time? And with reports that Reeves is considering cancelling a second official fiscal forecast to support her ambition of having only one major fiscal event a year, ¹⁶ Taylor H, ‘“OBR needs to change way it forecasts economic performance”, Reeves says’, The Standard, 29 September 2025, https://www.standard.co.uk/business/business-news/rachel-reeves-government-obr-international-monetary-fund-budget-b1250222.html  will the chancellor use this opportunity to make any other changes to the fiscal framework?

Is there evidence of a tax strategy?

After a 2024 budget in which she hiked taxes by £36bn, in particular with a big rise in employer national insurance contributions, Rachel Reeves looks set to raise substantial sums in tax again to ensure she can maintain spending plans without breaking her “iron clad” fiscal rules. But which taxes will Reeves look to increase – and by how much?

Much media speculation has focused on whether Reeves will dare to break Labour’s manifesto pledges and look to raise one of the big revenue-raisers – income tax, employee national insurance contributions or VAT – or instead end up covering the gap with changes (higher rates, reduced reliefs) to a wide range of smaller taxes. But there are other bigger picture questions.  

One is whether Reeves shows any appetite at all for tackling any of the anomalies and inefficiencies in the UK’s tax system that undermine the government’s growth mission.  Thus far she has not shown any inclination toward tax reform but will she use this budget to set out a clearer reform ambition? If so, how does this justify the choices she makes?  

The second is whether it is possible to discern any underlying tax strategy – either in her general approach or in specific areas such as pensions and savings, investment, or how to tax incomes – that might anchor this budget’s (and future) tax choices. That would also show how far the Treasury is prepared to use tax policy to support wider government objectives such as net zero or increasing opportunities. The rumours that she is considering introducing a new per mile charge for electric vehicles (EVs) hints at a strategy around the taxation of motoring – making steps to offset declining revenues from fuel duties and making some attempt to tackle the congestion externalities imposed by driving EVs. 

The speculation about the budget seems to have dampened both consumer and investor confidence. More clarity about the future direction of tax policy over the rest of the parliament, combined with greater headroom (as described above), could prevent that playing on repeat for Labour’s remaining Budgets.

How will the official forecast from the Office for Budget Responsibility (OBR) change?

The biggest change is expected to be a lower forecast for productivity growth, with OBR productivity forecasts too optimistic for some time (see below). Any reduction in the productivity forecast will result in lower forecasts of economic growth and tax revenues – with some reports suggesting a £10bn gap for the government to address – but will hopefully improve the accuracy of forecasts and help the government avoid nasty surprises in future. 

Partial U-turns on previously announced welfare policies (means-testing the winter fuel payment for pensioners and changes to disability and incapacity benefits), which were included in the previous OBR forecast, will be taken into account. This will increase forecast borrowing.

There is more uncertainty about what will happen to the rest of the forecast where there might be some good news for the chancellor. In particular, wage growth may be faster than the OBR expected in March, which should lead to higher future tax revenues. ¹⁸ Resolution Foundation, Black holes and consolidations: Previewing the key decisions for Budget 2025, 4 November 2025, www.resolutionfoundation.org/publications/black-holes-and-consolidations/

Overall, the OBR’s new forecasts are likely to imply that the government’s fiscal position in 2029/30 – when the chancellor has to meet her fiscal rules – will be worse than previously expected by somewhere in the region of £10bn to £20bn before any new policies are considered.

It is not unusual for the medium-term borrowing forecast to move by as much as £10bn from one forecast to the next, meaning it should not be unexpected for headroom of the size Reeves has so far retained to be wiped out. If Reeves wanted to build a larger buffer to increase resilience to future forecast changes, she would need to find additional tax rises or spending cuts, on top of what would be required simply to address any OBR forecast downgrade.

What is the outlook for household living standards?

In her recent budget scene-setter speech, the chancellor made the cost of living one of the key areas of focus for this budget. In March, the OBR set out an uneven picture for living standards with growth in real household disposable incomes slowing in the next two years before accelerating again in 2028/29 and 2029/30. 

This was driven by slowing growth in wages and benefits and by higher taxes as frozen tax thresholds move more people into higher tax bands and employers were expected to pass on increases in employer national insurance contributions to employees. Wage growth since March has been faster than the OBR expected and this may be reflected in higher forecasts for wages.

However, many households remain under pressure. Utility and food bills have been rising quickly, placing an increasingly heavy burden on household finances. Many households’ living standards are also critically dependent on government policy decisions around tax and welfare. What will be the consequences of the policies the chancellor announces for different types of households? 

What more do we learn about the government’s plans for public services?

This should be a relatively quiet budget for public services, with June’s spending review setting out the government’s departmental spending plans for the next three years. But the worsening fiscal situation since has led to reports that the government is considering cutting spending. ²⁴ oates S, ‘Chancellor Rachel Reeves admits tax rises and spending cuts considered for budget’, Sky News, 15 October 2025, https://news.sky.com/story/chancellor-admits-tax-rises-and-spending-cuts-considered-for-budget-13450207  That would be a mistake and would undermine the government’s commitment to provide services with more stability. 

Even if the government avoids cuts to cash spending plans during the spending review period (2026/26-2028/29), any increase in the inflation forecast will reduce the generosity of services’ budgets – which are set in cash terms – in real terms. As our recently published Performance Tracker shows, many services are struggling with financial pressure under existing budgets, so there is a strong argument for the government to top-up budgets if inflation ticks up.

Reeves’s fiscal rules are judged in 2029/30, which is one year beyond the end of the current spending review period. As a result, she could ‘save’ some money by pencilling in less generous spending plans for that final year. At the spring statement, the spending plans implied that day-to-day departmental spending would rise by 2.9% in cash terms (and 1.0% in real terms) in 2029/30. If she were instead to, say, freeze spending in real terms in 2029/30, that would save around £6bn in that year.

In her pre-budget speech, Reeves said that “in the budget and beyond, I will continue to drive for more productive and more efficient public services”. ²⁵ Reeves R, ‘Chancellors Scene Setter speech ahead of Budget 2025’, speech in 9 Downing Street, 4 November 2025, https://www.gov.uk/government/speeches/chancellors-scene-setter-speech-ahead-of-budget-2025  The government laid out departmental efficiency plans in the June spending review, worth a total of £14bn per year by 2028/29. It is unclear whether her recent words mean she intends to identify further efficiencies in the budget, or if she was recommitting to previously announced plans. 

A few months ago, Keir Starmer said that the government had moved into a phase of “relentless focus on delivery”. The budget is a chance to set out a detailed outcomes framework – rather than the vague milestones for it missions to show what it expects services to deliver and how it intends reform programmes to support those ambitions.

Is there any more clarity about the government’s plans for welfare reform?

This government’s abortive attempts to cut the winter fuel allowance and reform disability benefits means around £6bn of additional welfare spending in 2029/30 compared to what the chancellor planned for at March’s spring statement. ²⁶ The Institute for Fiscal Studies estimates the disability benefits U-turn mean the policy, originally due to save £5bn, will no longer save any money in 2029/30, while the winter fuel payment U-turn will cost around £1bn. https://ifamagazine.com/ifs-changes-to-the-universal-credit-and-personal-independence-payment-bill-mean-no-savings-for-the-chancellor-in-this-parliam… and https://www.bbc.co.uk/news/articles/c79eg2x5qnno  Despite these U-turns, the government insists that welfare reform is a priority. 

The recently established policy reviews on youth inactivity and disability benefits – due to report in summer and autumn 2026 respectively – indicate a more considered approach to welfare reform, but this will be undermined if the chancellor introduces reforms to adult benefits having once again not rolled the pitch. 

One welfare reform that has been subject to widespread speculation is a change to the ‘two-child limit’ – the policy which stops low-income families from receiving a universal credit uplift for more than two children. Removing the two-child cap would bring around 630,000 children out of poverty, at a cost of around £3.6bn, according to the IFS – although other less costly options are available.  ²⁷ https://ifs.org.uk/articles/options-reforming-two-child-limit  IFS analysis has shown that removing the two-child limit would be a cost-effective way to address child poverty, but that its introduction had no significant impact on school readiness, the government’s key milestone for its opportunity mission. ²⁸ https://ifs.org.uk/publications/what-effect-two-child-limit-childrens-school-readiness   Tackling child poverty is a Labour manifesto pledge and a priority of backbench MPs, and the pitch has been rolled for a package of measures to be announced – which the Child Poverty Taskforce has been weighing up for over a year.