The UK government is staring down the barrel of a major fiscal crisis as Chancellor Rachel Reeves prepares to deliver her Budget on November 26, 2025. The warning lights are flashing red across Whitehall after the Office for Budget Responsibility (OBR) signaled a substantial downgrade to the nation’s productivity outlook, threatening to blow a £20–50 billion hole in the public finances. This looming shortfall could force Reeves into a corner, with tax hikes and spending cuts both firmly on the table, despite Labour’s previous promises to the contrary.
According to BBC, the government’s official forecaster has sharply reduced its expectations for UK productivity growth, a move that could leave the Chancellor scrambling to fill a £20 billion gap just to meet the government’s own tax and spending rules. The OBR’s final forecast, due to be published alongside the Budget, is expected to confirm these grim projections. Reeves herself has acknowledged that both tax rises and spending cuts are being considered as options to restore stability and meet fiscal targets.
The scale of the challenge, however, may be even greater than first feared. As reported by The Independent and Daily Mail, economists now warn that the fiscal black hole could reach as high as £50 billion. This is due in large part to the OBR’s anticipated downgrade of UK productivity by as much as 0.3 percentage points—a seemingly small adjustment that, according to the Institute for Fiscal Studies, adds roughly £7 billion to government borrowing for every 0.1 percentage point drop. The Chancellor’s predicament is further compounded by an existing £40 billion gap and an additional £10 billion of ‘headroom’ needed to brace for future shocks.
“The underpinning for economic growth is stability, and I’m not going to break the fiscal rules that we’ve set,” Reeves said during a recent trip to Saudi Arabia, as quoted by The Independent. She added, “We are going to reduce that primary deficit, we are going to see debt starting to fall as a share of GDP, because we need more sustainable public finances, especially in the uncertain world in which we live today.”
But the Chancellor’s options are narrowing fast. Reeves has already overseen £40 billion in tax increases since taking office, and Labour’s 2024 manifesto explicitly promised not to raise income tax, National Insurance, or VAT. Yet, as Rob Wood of Pantheon Macroeconomics told the Daily Mail, “Meeting Budget rules to bring down borrowing and debt while also increasing the ‘headroom’ against these targets would mean up to £50 billion of tax rises and spending cuts.” He noted that even if the gap is trimmed to £40 billion, “it would still significantly raise the probability that the Chancellor resorts to a manifesto-breaking income tax hike.”
Martin Beck, chief economist at WPI Strategy, echoed those concerns, stating, “Given the scale of the challenge, breaking the manifesto pledge not to raise the ‘big three’ taxes may become unavoidable.” He pointed out that a 2p increase in both the basic and higher rates of income tax, or reversing the 2023–24 National Insurance cuts, could each raise around £20 billion—enough to plug the gap, but at significant political cost.
The OBR’s decision to revise its forecasts now, rather than during the previous Conservative government, has reportedly angered officials in No 10. The Tories have seized on the news as evidence of Labour’s alleged failure to deliver on its growth promises. Shadow Chancellor Mel Stride told the Daily Mail, “Labour promised growth, but if the OBR downgrades its forecasts it will be a damning verdict on Labour’s failure to deliver. Rachel Reeves wants to blame everyone except herself. But these forecasts are forward-looking. Labour don’t have a plan to fix productivity and don’t have the backbone to cut spending—that is why under Labour we will always be stuck in a doom loop of more spending, increasing debt and high taxes.”
For her part, Reeves has pointed to Brexit as a significant factor in the UK’s economic malaise. Speaking at the Future Investment Initiative in Riyadh, she said, “There are obviously huge benefits from rebuilding some of those relations, but also inflation is too high. One of the reasons for that is that there’s too much cost associated with trade with our nearest neighbours and trading partners.” She described the UK’s productivity record since the financial crisis and Brexit as “very poor,” according to Key Media.
Speculation is swirling over how Reeves will choose to fill the fiscal gap. Proposals under consideration include a new mansion tax on properties worth over £2 million—owners would face a charge of 1% on the value exceeding that threshold, which would mean an annual bill of £10,000 for a home worth £3 million. However, experts like former Institute for Fiscal Studies director Paul Johnson have cautioned that such a levy alone would not be enough to close the gap. He has called for wider reforms to property taxes, such as making council tax proportional to current property values and scrapping stamp duty altogether.
Meanwhile, the looming threat of tax increases or tighter public spending has sent ripples through the mortgage and housing sectors. Craig Head, director at Mortgage Required, warned that such measures “would almost certainly weaken mortgage affordability, cool housing demand and sap borrower confidence over the next few months.” Katherine Stagg of Stagg Mortgages agreed, noting that “any fiscal tightening—especially if it impacts income tax thresholds or property levies—could dampen borrower confidence and cool housing demand in the short term.”
Yet some within the industry argue that the Treasury has options to raise revenue without destabilizing the property market. Matthew Arena, managing director of The Brilliant Group, suggested that higher levies on large corporates or the highest earners would have only “marginal” consequences for the housing market. However, he warned that tax increases below the top income tier “would hit those on the margins the hardest—such as first-time buyers, those saving for a home or young families looking to upsize.”
Amid all this, the effective tax rate on average earners making £33,000 a year has climbed to 27%, the highest in 13 years, according to research by the Resolution Foundation. The Treasury has so far declined to comment on any specific measures, maintaining that it will not be drawn on speculation ahead of the OBR’s forecast release.
With just weeks to go before the Budget, the stakes could hardly be higher for Rachel Reeves and the government. The choices made on November 26 will not only determine whether the Chancellor meets her fiscal rules, but also shape the economic landscape for households, businesses, and the housing market for years to come.
