How will Reeves plug the UK's fiscal black hole?
Why is the UK government facing a daunting fiscal gap ahead of the budget? What’s driving this so-called ‘black hole’ and what could filling it mean for the economy, markets and you?
Duration: 27 Mins
Date: 25 Sept 2025
Paul and Luke are joined by Lizzy Galbraith, senior political economist, to discuss the UK finance minister’s tough choices, potential tax increases and the state of the UK economy.
Some highlights:
Policy reversals, rising costs. Government U-turns—scrapping planned benefits cuts and restoring winter fuel payments—mean spending will be higher than the government had originally planned. Meanwhile, higher government bond yields are pushing up borrowing costs, while the Office for Budget Responsibility is expected to downgrade its productivity forecasts. All of this will widen the fiscal gap.
Three ways out. Reeve’s options to tackle this fiscal gap include:
- Loosening the fiscal rules, risking market backlash and higher borrowing costs.
- Cuttting spending – a politically tough sell with pressure to boost benefits and defence.
- Raising taxes, with measures like refreezing income tax bands, raising ‘sin taxes’ and increasing bank levies all likely.
Growth ambitions meet reality. Labour’s reform agenda faces headwinds as political trade-offs and economic realities slow progress. While the government remains committed to boosting long run growth, expectations have been tempered by the challenges of office.
Why it matters. The choices made in this budget will ripple through the economy. Higher taxes or spending cuts could slow growth, while inflation risks remain top of mind for both the government and the Bank of England. The timing of the budget may even influence when interest rates next move.
Listen to the latest episode of our Macro Bytes podcast for the full discussion.
