The Institute for Fiscal Studies (IFS) Says Reeves’ Budget Lacks Tax Reform Needed to Unlock UK Growth

Rachel Reeves entered the 2025 Autumn Budget promising stability, credibility and long-term growth. Instead, Britain emerged with a record tax burden, frozen thresholds stretching into the next decade, and a chorus of economists asking why such a big tax rise delivered so little by way of genuine reform.

The Institute for Fiscal Studies (IFS) has delivered one of the sharpest verdicts. Its director Helen Miller described the Budget as a government “trying to scrape through”, warning that chancellors keep shying away from the kind of deep tax reform that could “move the dial” on growth.

This article looks at what Reeves actually announced, why the IFS and other thinktanks are so critical, and what it all means for households, businesses and the wider economy.

Key Points

• The 2025 Autumn Budget raises about £26 billion in extra taxes by the end of the decade and pushes the overall tax burden to around 38% of GDP, the highest in modern peacetime.

• The IFS says the Budget was a missed opportunity for serious tax reform, criticising the continued reliance on freezes and stealth measures that may damage growth.

• A long freeze on income tax thresholds to 2030–31 will pull millions more people into paying tax or into higher bands through “fiscal drag”, with poorer and middle-income workers hit hardest.

• Reeves has scrapped the two-child benefit cap and cut energy bills, arguing that targeted welfare measures and stability will pay off in the long run, even as working households shoulder higher tax.

• The Office for Budget Responsibility (OBR) forecasts growth of around 1.5% a year and warns the public finances remain “vulnerable”, despite an enlarged fiscal buffer.

• An embarrassing leak of the OBR’s Economic and Fiscal Outlook before Reeves rose at the despatch box has raised fresh questions about budget security, though markets still responded calmly.

Background

The Autumn Budget 2025 is the first full fiscal set-piece for the new Labour government after its election victory earlier in the year. Reeves has framed her approach around “stability first”, determined to avoid the market chaos that followed the Truss–Kwarteng mini-budget in 2022. Bond markets were watching closely, and so were voters who had heard repeated assurances during the election that Labour would not raise income tax rates.

The economic backdrop is difficult. The OBR has revised down medium-term growth expectations to around 1.5% a year, largely because of a weaker productivity outlook. Public debt is high, interest costs remain elevated compared with the pre-pandemic era, and demographic pressures are pushing up spending on health, pensions and disability benefits.

Into that environment, Reeves has chosen to raise substantial revenue without touching the main income tax rates. The centrepiece is a further, extended freeze to income tax thresholds and the personal allowance out to 2030–31, building on earlier freezes announced under Conservative chancellors. That freeze interacts with pay rises and inflation to pull more people into the tax net over time.

Alongside the freeze, the Budget introduces a council-tax style “mansion tax” surcharge on high-value properties, new restrictions on pension salary-sacrifice, higher taxes on dividend and savings income and changes to vehicle taxation, including the move towards pay-per-mile charges for electric vehicles.

On the spending side, Reeves has taken a major political step by abolishing the two-child benefit cap, a policy long attacked by anti-poverty campaigners. The government says this will lift hundreds of thousands of children out of poverty. Energy bill support and targeted help for low-income households also feature.

The Budget therefore combines high-profile progressive moves with a series of revenue-raising measures that are less visible but very large. It is that mix that now sits under the microscope.

Analysis

The IFS Critique: Big Taxes, Small Reform

The IFS’s initial response is blunt: this was not a “grand tax-reforming Budget”. It argues that, while raising taxes to stabilise the public finances may be unavoidable, the way those taxes are raised matters greatly for growth.

Instead of reshaping the tax system to reduce distortions and encourage investment, the government has leaned heavily on freezing thresholds and tweaking existing reliefs. The IFS has long highlighted how the UK’s mixture of income tax, National Insurance and complex banding creates odd jumps in marginal tax rates and weak incentives to work extra hours, invest or move for better-paid jobs.

By extending the freezes for another three years beyond what was previously planned, Reeves has amplified those distortions. According to figures quoted by the IFS, the effect of the freeze from 2022 through to 2030–31 is expected to bring about 5.2 million extra people into the tax system and push around 4.8 million more into higher-rate bands, though the exact outcomes will depend on inflation.

For the IFS, the problem is not only distributional. Higher marginal tax rates for broad swathes of workers can weigh on labour supply, dampen progression and drag on productivity. That is why Miller says tax reform – not just tax rises – is essential if the government is serious about a growth mission.

Resolution Foundation: Strategy Gap and Fiscal Drag

The Resolution Foundation reaches a similar conclusion from a different angle. It notes that the government’s approach to “fiscal consolidation” has swerved sharply in a matter of months. Earlier plans leaned heavily on cuts to disability benefits and regressive welfare changes; the new Budget relies more on broad-based tax increases that hit the better-off more. Yet it still concludes that the overall strategy is muddled. The Guardian+1

The thinktank points out that freezing thresholds is, for most of the income distribution, a harsher way to raise revenue than a small rise in tax rates. It calculates that a one-pence increase in all income tax rates would have left anyone earning under about £35,000 better off than the current plan, while raising a similar amount of revenue.

That matters because the government has anchored its political narrative on not raising the main tax rates. The result, critics argue, is a stealthier form of tax hike that falls more heavily on low and middle earners, even as ministers insist they have kept their manifesto promises.

OBR: Vulnerable Finances and Modest Growth

The OBR’s new Economic and Fiscal Outlook underpins the entire package. It confirms that Reeves has expanded her “fiscal headroom” – the gap between projected borrowing and her main fiscal rule – from just under £10 billion to around £22 billion. That is one reason markets reacted calmly, with gilt yields falling immediately after the Budget.

But the watchdog also warns that the public finances remain “vulnerable” to shocks. Growth is subdued. Debt is high. A future downturn, another global crisis or a jump in interest rates could quickly erode that headroom. In that scenario, a tax system that already squeezes workers and investors may not be well-placed to support recovery.

The OBR’s early-release fiasco has added political drama. Its report appeared online before Reeves began speaking in the Commons, prompting an investigation and a public apology from chair Richard Hughes, who has said he will resign if ministers lose confidence in him.

Political Balancing Act

Politically, the Budget is a delicate balancing act. Reeves can point to the abolition of the two-child benefit cap, the protection of disability benefits compared with earlier proposals, and targeted cost-of-living help as evidence that the burden of adjustment falls more on richer households.

At the same time, the extension of threshold freezes, the mansion-tax style surcharge, and higher levies on property, savings, dividends and landlords have triggered loud opposition from parts of the press, business groups and wealthier voters. Some Conservatives are branding it a “Benefits Street Budget”, accusing Labour of hitting workers and homeowners to fund welfare.

The IFS and Resolution Foundation, however, are not arguing against redistribution in principle. Their concern is that the shape of the tax system – and the absence of a clear reform strategy – could leave Britain with both high taxes and low growth.

Why This Matters

The IFS debate is not academic. It goes to the heart of how the costs of an ageing society, a stretched health service, climate transition and sluggish productivity will be shared.

Households on low and middle incomes face a squeeze from several directions. Fiscal drag means more of each pay rise goes to the Exchequer. Higher property and savings taxes can chip away at wealth-building. At the same time, the abolition of the two-child cap and energy-bill support will be life-changing for some of the poorest families.

For businesses, especially those in housing, gambling and some investment sectors, the new measures change incentives. Landlords and property investors have warned of rent pressures and weaker investment, while gambling firms have flagged the sharper remote gaming duty as a serious hit to profits and jobs.

Internationally, Britain is signalling that it will meet its fiscal challenges through higher taxes rather than large-scale spending cuts. That may reassure bond markets, but the risk is a long period of mediocre growth with little political space to tackle public-service backlogs.

Over the next year, key things to watch will include:

• Whether wage growth and inflation track the assumptions underpinning the threshold freeze.

• How quickly additional taxpayers appear in official data.

• Any follow-up announcements on long-promised reforms to property tax, income tax and National Insurance.

• The Bank of England’s response if higher taxes cool demand faster than expected.

Real-World Impact

Consider a mid-career nurse or teacher on a salary that rises steadily with experience. Even modest annual pay awards will, under a prolonged threshold freeze, nudge more of their income into higher bands. Their headline tax rate has not changed, but their effective tax burden has crept up year after year. The Budget offers some energy-bill relief and improved public-service funding, yet take-home pay still feels tight.

A small business owner running a limited company faces a different mix. Higher taxes on dividends, tighter rules on pension salary-sacrifice and the prospect of increased local property charges all affect how they pay themselves and invest. For some, the added complexity and cost could tilt decisions on hiring, expansion or even whether to remain in the UK.

A household in a high-value property, particularly in London or the South East, may not see themselves as wealthy but will be caught by the new mansion-tax style levy once it comes in. They may face higher council-tax-type charges without feeling any better-off in terms of income, deepening regional resentment about how housing wealth is taxed.

By contrast, a low-income family with three or more children stands to gain significantly from the end of the two-child benefit cap. That extra income could mean a warmer home, fewer moves between temporary accommodations and better chances for children at school – changes Reeves argues will pay off for society and the economy over time.

Conclusion

The IFS’s charge is simple: if growth is the mission, Britain’s tax system cannot just get bigger; it must get better. Reeves’s first full Budget opts for size over shape, using threshold freezes, surcharges and targeted tweaks to raise large sums while leaving the underlying structure of taxation largely intact.

Supporters will argue that, in a fragile economy with stretched public services, stabilising the public finances and investing in child poverty and energy support are achievements in themselves. Critics counter that a historic tax burden, layered onto a poorly designed system, is a risky foundation for long-term prosperity.

What happens next will depend on whether this Budget is a prelude to deeper reform or the high-water mark of a government content to live with a heavy, distortionary tax state. The signals to watch are clear: future Budgets, any comprehensive tax-reform proposals, the trajectory of growth and productivity, and whether public frustration over stealth taxes and squeezed living standards hardens into a lasting political backlash.