Deutsche Bank: £10bn of tax hikes coming in Autumn Budget
Chancellor Rachel Reeves is expected to raise taxes by at least £10bn in this year’s Autumn Budget as rising inflation and increased spending eat into the Treasury’s fiscal headroom.
“With a tough Spending Review due in June, we expect fiscal news to worsen over the coming months,” said Deutsche Bank analysts in a research note.
“By the time the Autumn Budget rolls around, the Chancellor’s fiscal headroom will have likely evaporated.”
With an expected increase in defence spending and plans to ease the cuts to winter fuel payments, Reeves is expected to be forced to make further tax hikes to comply with her fiscal rules.
Combined with higher interest rate costs and higher unemployment, borrowing pressures will only increase, the bank’s analysts said.
Inflation is expected to surge
Deutsche Bank now expects inflation to average 3.3 per cent in 2025, a sharp increase from its previous forecast of 2.8 per cent that was made last November.
Inflation surged in April to 3.5 per cent, up from 2.6 per cent in March and above economists’ expectations, thanks to higher taxes and stickier service prices. The bank now expects services inflation to be as high as 4.5 per cent in the last quarter of the year.
“Tweaks to the fiscal rules can’t be ruled out either – though we see this as a high bar,” added the analysts
However, there was some good news for Reeves: Thanks to the strong GDP numbers in the first quarter of 2025, Deutsche Bank upgraded growth forecasts from the year from 0.8 per cent to 1.2 per cent, though this was still below the 1.3 per cent it had expected in November.
The “meaningful threat” of trade wars to growth has receded, the analysts explained, as deals with the US and India to slash import taxes are set to marginally boost GDP.
“It’s not all upside, however. Headwinds have reduced – but remain,” they added.
“Domestically, we expect real disposable incomes to be squeezed over the coming quarters. Nominal wage growth will likely slow further into year-end. Softer hiring intentions will also hit the labour market.”
Deutsche Bank is still expecting the Bank of England to cut interest rates three times this year in August, November and December, leaving rates at 3.5 per cent by the end of the year.
“For the first time this cycle, we also think that the window for rate cuts may be starting to narrow,” they added.