The Chancellor’s Trilemma
Think tank: National Institute of Economic and Social Research (NIESR)
Author(s): Various authors
August 6, 2025
This report from UK think tank the National Institute of Economic and Social Research analyses the UK economic outlook in the summer of 2025.
The Government is on track to miss its ‘stability rule’ by £41.2bn in the fiscal year 2029-30 due to higher-than-expected public sector borrowing, the reversal of cuts to welfare, and weaker-than-expected GDP growth.
As a result, we believe that the Chancellor faces an impossible trilemma: simultaneously meeting her fiscal rules, fulfilling spending commitments, and upholding manifesto promises to avoid tax rises. We therefore anticipate that there will be tax increases in the Autumn Budget so that the Chancellor remains compliant with her fiscal rules.
We expect CPI inflation to remain significantly above the MPC’s target, at around 3.5 per cent in 2025, and 3 per cent in the second quarter of 2026, with there being one further cut to interest rates by the Bank of England in 2025.
We project UK GDP to grow modestly at 1.3 per cent in 2025 and 1.2 per cent in 2026, placing the UK in the middle of the G7 economies.
