Goldman Sachs analysts are predicting tax hikes ranging between £15 billion and £20 billion in next month’s Autumn Budget, as Britain’s new Labour government seeks to address what it has labelled a £22 billion “black hole” in public finances. This comes as Chancellor Rachel Reeves prepares to deliver her first budget on October 30, in what Prime Minister Keir Starmer has already warned will be a “painful” fiscal package.

Tax Increases on the Horizon

Goldman Sachs anticipates that the government will raise taxes on capital gains and inheritance as part of its efforts to plug the significant gap in the country’s finances. These tax increases are likely to be part of a broader strategy to generate revenue without going back on key campaign promises made by the Labour Party during its successful election bid earlier this year.

Labour had pledged to leave national insurance, VAT, corporation tax, and income tax unchanged throughout its campaign, a commitment that Goldman analysts say has “complicated” the government’s ability to raise funds. As a result, the expected tax hikes will likely target less politically sensitive areas, such as capital gains and inheritance tax, which typically affect wealthier individuals.

A Balancing Act for Labour

While the Labour government has sought to stick to its electoral promises, the necessity of filling the budgetary shortfall has left it with few alternatives. Goldman Sachs analysts believe that the new government will unveil a series of smaller, more targeted tax-raising measures in its Autumn Budget. These could extend to pension contribution relief, though any such move would risk diminishing disposable income and potentially dampening consumer demand.

The bank’s analysts have also expressed concerns that these fiscal measures could weigh on economic growth. Although increased public spending is expected to drive some expansionary effects, the simultaneous tax hikes could offset this by curbing demand. “We expect fiscal policy to remain a modest drag on demand in the coming years,” the bank said.

A Tough Fiscal Outlook

The October 30 budget will be a crucial test for Chancellor Rachel Reeves, who is tasked with balancing Labour’s manifesto promises with the economic realities of the nation’s growing debt burden. Although Labour pledged to avoid raising certain taxes, the party’s commitment to fiscal responsibility will likely require it to make tough decisions to maintain economic stability.

Goldman’s forecast suggests that the government will walk a tightrope, aiming to avoid the kind of political backlash that could come from U-turning on major tax pledges, while also finding ways to raise necessary funds. With the Prime Minister already bracing the public for a painful budget, the expectation is that the government will prioritise long-term economic health over short-term political gains.

Risks Ahead for Labour’s Economic Strategy

The upcoming budget also presents risks for the broader economy. If tax increases are too steep or poorly timed, they could undermine consumer confidence and investment, creating headwinds for growth just as the country is recovering from the economic fallout of the pandemic and global inflationary pressures.

Nonetheless, Labour’s focus on protecting key taxes like income tax and national insurance reflects its desire to shield the broader population from further financial strain, particularly as inflation remains a concern for many households. But with a £22 billion financial hole to fill, the government’s room for manoeuvre is limited.

As the Autumn Budget looms, all eyes will be on how Chancellor Rachel Reeves navigates this challenging fiscal landscape, balancing economic growth, public spending, and the need for new revenue streams to address the nation’s debt.