IFS Accuses UK Budget of ‘Fiscal Fiction’ Amidst Backloaded Tax Rises and Spending Restraint

IFS Warns UK Budget Relies on ‘Near-Heroic’ Spending Restraint

The United Kingdom’s economic future is facing a critical moment, according to the Institute for Fiscal Studies (IFS). In their post-Budget analysis, the respected think tank has raised serious doubts about the government’s ability to deliver on ambitious tax rises and spending cuts planned by Chancellor Rachel Reeves. The IFS, led by director Helen Miller, described the measures as ‘fiscal fiction’—a term that cuts to the heart of current political anxieties and economic realities.

Delayed Tax Rises: Election-Year Gamble

At the core of the IFS’s criticism is the government’s decision to backload major tax increases and spending restraint until the final years of the current parliament, with most changes set to hit just before the expected 2029 general election. Reeves’ Budget introduced significant measures, such as a new ‘mansion tax’ on properties worth over £2 million and a pay-per-mile levy for electric vehicles. Yet, these policies will not come into effect until 2028, leaving their future implementation in doubt—especially given the proximity to election season.

Helen Miller highlighted that much of the fiscal ‘headroom’—the buffer against breaching fiscal rules—relies on reducing day-to-day departmental spending growth from 1% to just 0.5% annually in 2028 and 2029. This, she noted, would require ‘near-heroic restraint’ and represents a third of the Chancellor’s newly created fiscal breathing space. The Resolution Foundation, another leading think tank, echoed these concerns, describing the plan as ‘pre-election austerity’ and warning that history shows governments often abandon such constraints as elections approach.

Rising Taxes, Stagnant Incomes: Households Face ‘Dismal’ Outlook

Beyond the technical debate, the IFS drew attention to the real-world impact on British households. Their analysis, supported by the Office for Budget Responsibility (OBR), forecasts average disposable income growth at just 0.5% per year over the next five years—a figure Miller called ‘truly dismal’ compared to the more than 2% annual rises seen from the mid-1980s to mid-2000s. For many, this means little to celebrate: the typical Briton can expect an annual increase in disposable income of just £104 for the next four years.

The government’s extension of the freeze on income tax and National Insurance thresholds for three more years will, by 2029, pull more than a quarter of taxpayers into the highest tax brackets. Basic-rate taxpayers will pay an extra £220 a year, while those in the higher-rate bracket will see their bills rise by £600. These changes are projected to raise an additional £22 billion in revenue by 2030, but critics argue that the burden falls disproportionately on working people.

Manifesto Promises and Market Reaction: Credibility on the Line

The Labour Party, led by Prime Minister Sir Keir Starmer and Chancellor Reeves, had pledged not to raise taxes on ‘working people’ in their 2024 manifesto. However, the freeze on tax thresholds and the new pension cap have led the IFS and others to accuse the government of breaking this promise. Reeves, for her part, has argued that her choices are ‘fair and necessary’ to fund priorities like cutting NHS waiting lists and supporting families.

In financial markets, the Budget’s unveiling brought a muted response. The interest rate on 10-year government bonds fell slightly, while sterling rose by 1% against the dollar. Economists like Richard Potts of Bondford suggest that investors are reassured—for now—by the government’s expanded fiscal headroom and the Labour leadership’s success in selling the package to its own MPs, avoiding a leadership challenge. However, some, like Michael Brown at Pepperstone, remain skeptical that such large tax hikes will actually be delivered so close to an election, likening belief in the plan to ‘buying a bridge.’

IFS: Growth Ambitions Fall Short

Another major critique from the IFS is the government’s lack of bold action to boost economic growth, despite claims that growth is its ‘number one mission.’ Miller argued that the Budget could have included deeper tax reforms, as well as more ambitious changes in competition policy, regulation, and education. The OBR’s forecast downgrades were minimal, and there was ‘no big fiscal repair job’—but also, no transformative plan for the UK’s sluggish economy.

In summary, the IFS and other analysts see the 2025 Budget as a high-stakes gamble: it relies on delayed pain, ambitious restraint, and optimistic assumptions about the political will to stick to tough choices. If the government fails to deliver, the UK could face renewed fiscal pressures, disappointed households, and volatile financial markets as election year approaches.

The IFS’s verdict is a sobering reminder that fiscal plans are only as credible as the political realities behind them. With most of the pain postponed and the promises stacked high, the coming years will test the government’s resolve—and the public’s patience—like never before.