Budget 2025: The Chancellor’s Trilemma
Just how big will the fiscal black hole be at the time of the Autumn budget and how can the Chancellor fill it? The latest gloomy news is that it will £50billion – made up of current some commentators projections of £40billion plus the Chancellor’s required £9.9billion buffer. Certainly, the consensus is that there will be a black hole, although there is debate around just how big it will be. It could be anywhere between £20billion and £50billion depending upon your economics institute of choice!
The current contributing factors causing the Chancellor angst are:
Lower than expected economic growth
Less than expected tax revenue
A failure to implement the Welfare Reforms which would have saved money
The Winter Fuel Allowance being restored which cost more money
Therefore, effectively the Chancellor is faced with a ‘Trilemma’ come the November Budget:
The Fiscal Rules. Perhaps her most important flagship economic policy – to get the nation’s current account in balance by 2030. The ‘Rules’ could potentially be softened? But how will that be seen politically and what would be the potential market impact and resulting loss of confidence? We all saw what happened to Liz Truss.
The Labour Government’s Spending Commitments. You would think that any spending commitments are pretty firmly in place both in the eyes of those in need of the money and voted for Labour on that basis and in the eyes of the wider Labour party membership. Is this Labour Government in a position to delicately move away from some of those spending commitments? Unlikely, but possible.
No ‘Tax Harm’ to Working People. All the talk and speculation is around taxation and what elements of tax can be increased and what tax changes will actually generate the money need – without affecting ‘working people (which would rule out changes to income tax, employees national insurance and VAT).
What Tax Changes Might Fill The Black Hole?
Income Tax: Could the Chancellor make the U-Turn of all U-Turns and hit ‘working people’ direct with an income tax rise? As an aside, its been calculated that adding 5% to basic, higher and additional rate income tax would in theory solve the black hole problem – but of course this would have massive implications economically and politically. However, an extension in the freeze to income tax thresholds to 2020 looks a certainty – increasing tax revenues by using fiscal drag. This is an easier move politically as people don’t really understand it and it doesn’t affect people’s pockets right now. It has been calculated that this move could contribute up to £10billion by 2030.
Capital Gains Tax: History and experience around the world has shown that due to behavioral change and planning, any increase in capital gains tax actually reduces the amount of revenue received.
Wealth Tax: There has been constant talk and speculation around imposing a wealth tax on the very richest in society. The problem here is that there is little analysis made beyond the ideology of it. Experience of Wealth Taxes around the world show that it’s not a great revenue generator – again due to behavioral change.
Pensions Tax Relief: Years and years of speculation in the making. Will we see another tinkering with pension tax rules? With limiting up front pension tax relief to a fixed amount (25% or 30% relief has been talked about previously) or even limiting further the pension commencement lump sum amount?
Removal of the State Pension Triple Lock: With regard to projecting forward 5 years to 2030, this would certainly help.
What does all this mean for later life financial planning? Over the next few months in the lead up to the Budget on 26th November we will be providing insightful commentary and advice for those in later life. This can be best accessed reviewing our regular blog articles and commentary on the Harold Stephens website and social media channels. Use this link to find ‘Harold Stephens IFA’ on You Tube and subscribe to the channel to get the very latest videos direct from Richard Higgs, later life financial planning specialist.
Finally, register and reserve your place at one of our 2 post-budget Later Life Financial Planning live events to be held on Wednesday December 3rd 2025 by emailing office@haroldstephens.co.uk.