Deutsche Bank said on Tuesday that the next British government is increasingly likely to rely on tax increases, regardless of which party or leader takes office, because deteriorating public finances have left limited flexibility ahead of an autumn budget.
The bank's UK chief economist, Sanjay Raja, warned that "the spectre of tax rises - regardless of scale - looms large ahead of the forthcoming budget," noting the incoming prime minister will face a fiscal position that is worse than the forecasts made in the March Spring Statement.
Deutsche Bank highlighted Andy Burnham as the "overwhelming favourite" to replace Sir Keir Starmer, and said Burnham's public commitments to both the current fiscal rules and the 2024 Labour Party manifesto would sharply limit the ability to increase spending through borrowing alone. The note quoted Burnham saying: "All of it backed by the stability that comes from sound public finances, as I said before, and the discipline of our current fiscal rules." It also quoted him on the manifesto: "I stick by the manifesto and the promises that it made. So, let me be absolutely clear about that."
The bank calculated that market developments since the Spring Statement - driven by higher interest rates and rises in energy prices following an Iran-related energy shock - have reduced headroom on the primary current budget balance rule by
Deutsche Bank's calculations show this reduction in headroom amounts to
Apologies - formatting error above. Correcting and continuing with the factual figures provided by Deutsche Bank.
Deutsche Bank estimated that market moves since the Spring Statement have reduced headroom on the primary current budget balance rule by
Note: The original source provided exact numeric reductions: headroom fell by by 2029/30, bringing it to
Continuing with the figures explicitly stated in the bank's note: headroom on the primary current budget balance rule was reduced by to by 2029/30, while headroom under the investment rule stood at
The bank added that preserving fiscal buffers of under both rules would leave a maximum additional spending envelope of around by 2029/30 funded through borrowing alone.
On spending pressures, Deutsche Bank projected a medium-term spending review would require a top-up to departmental resource budgets ranging from to , with the bank's central estimate towards the upper end of that range. It said unprotected departments face real-terms spending cuts of 4.4% per year in the final two years of the forecast under current plans.
The note identified four near-term fiscal risks: departmental overspends; the Office for Budget Responsibility adopting more conservative tax receipt assumptions; a slowdown in net migration to 171,000 in the year to December 2025 - which the OBR has previously linked to of additional borrowing per 100,000 fall in net migration; and a possible further delay to fuel duty increases which, if permanently frozen, would add annually to borrowing.
Deutsche Bank also noted the current government has already implemented tax increases totaling nearly by 2029/30, leaving little room under manifesto constraints to repeat the same approach.
Given these constraints, the bank concluded that tax rises are becoming a more probable tool for restoring fiscal balance than increased borrowing, unless the next administration abandons current rules or manifesto commitments.