The Government is on track to miss its key fiscal rules, increasing the likelihood of tax hikes later this year, an economic think tank has warned.
Economic growth is also on track to be weaker than previously expected this year, according to the National Institute of Economic and Social Research (Niesr).
Fresh forecasts from the organisation indicated that a slowdown in domestic demand and global economic uncertainty will impact potential growth throughout the year.
It predicted that the UK economy will grow by 1.2% in 2025 “amid low business confidence, high uncertainty and rising cost pressures”.
In its previous forecasts in February, Niesr had pointed to 1.5% growth for the year.
The think tank indicated that the reduced level of growth will result in lower than previously predicted tax receipts.
As a result, it said the Government is now expected to miss its fiscal rules requiring UK national debt as a share of the economy to fall and to be on course for a budget surplus.
In the Government’s spring statement, Chancellor Rachel Reeves said state finances were on track to give a headroom worth around £9.9 billion by 2029/30.
Niesr’s forecasts suggest this could now be set for a shortfall of £62.9 billion over this time frame, suggesting the Treasury could need to look at more spending cuts or tax increases to achieve a surplus.
Stephen Millard, Niesr interim director, said: “The Chancellor’s self-imposed and arbitrary fiscal rules have led to a situation where twice a year the Chancellor has to either find further departmental savings or announce politically unpalatable tax rises.
“The uncertainty created by this leads to low investment and lower growth, the precise reverse of what the government wants to achieve. We have to rethink the fiscal framework.”
The organisation’s fiscal outlook also pointed towards rising inflation for the year, which it expects to average 3.3% in 2025.
Previously, Niesr had predicted it would average 2.4% for the year, with a peak of 3.2%.
It is the latest body to trim back the UK’s economic growth contexts amid pressure from changes to US tariff policies on the global economy.
Last month, the International Monetary Fund (IMF) cut its UK growth forecast by 0.5 percentage points to 1.1% for this year.
Adrian Pabst, deputy director for public policy at the organisation, said: “The Government’s ambition of boosting growth and living standards in every part of the United Kingdom requires a comprehensive, credible plan of economic transformation which is yet to emerge.
“While planning reform and infrastructure investments in London and the South East will add to GDP growth, we need higher public investment in second-tier cities and poorer regions to unlock greater business investment.”
The Conservatives meanwhile accused Ms Reeves of “playing fast and loose with the public finances”.
Shadow chancellor Mel Stride added: “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.”
