28 October 2025: An economy has never taxed its way to growth

The budget is still a month away, but economists and analysts have resigned themselves to the fact that Chancellor Rachel Reeves is going to raise taxes to close the £20 billion black hole in the nation’s finances.

During the run-up to last year’s General Election, Reeves made several pledges that she said would be “cast in stone”. The one which grabbed the voter’s attention the most was that she would not raise income tax, national insurance or VAT for ordinary working people.

That pledge only remains in place today because of some semantics last year, when she increased the employer's National Insurance contributions, which, although they led to price increases for workers, were not directly paid by them.

Now we are back to a similar situation, although Reeves has already acknowledged that some taxes will need to rise to repair the country’s fiscal position. Her team at the treasury has spent the past six months leaking several proposals to gauge the public’s reaction.

Some experts believe she should raise the lowest income tax rate by 1%. This would allow her to clean the slate and get on with supporting investment and growth. She is unlikely to do this since it would damage the Government’s already fragile ratings in opinion polls.

One tax which is expected to rise is the gambling tax. EY conducted new research into the impact of proposed gambling tax hikes. The Betting and Gaming Council has claimed that a possible gambling tax hike in the UK could wipe £3.1bn off the sector’s UK economic contribution. With Reeves widely expected to announce tax changes for the industry in the autumn budget next month, the lobby group commissioned EY to research the possible impact of such a move.

Over 100 Labour politicians and the entire Liberal Democrat party are supporting proposals from the think tanks to raise taxes on UK gambling to reduce child poverty. However, the BGC argues that such a move would risk job losses, push more customers into the black market, and reduce the sector’s contribution to the UK economy, while raising only a fraction of the claimed amount.

The BGC said its members currently contribute £6.8bn to the UK economy, pay £4bn in tax, and support over 109,000 jobs across the country, including thousands of high-skilled tech roles in areas like Stoke-on-Trent, Manchester, Leeds, Nottingham, Sunderland and Warrington.

The Bank of England Governor has time on his hands since the Monetary Policy Committee doesn’t meet for another week. So he has been voicing his concerns about the non-bank finance market, which, as usual, has grown in response to similar developments in the United States.

He is most concerned about the unregulated nature of this relatively new form of finance, which could create circumstances similar to those surrounding the 2008 financial crisis.

Britain’s financial sector is bracing for new regulations on private credit and riskier non-bank lending, after Bank of England Governor Andrew Bailey warned of parallels with the global economic crisis, even though some in the sector believe talk of systemic failure is an overreaction.

The pound rallied on the “risk-on” sentiment over the possibility of a trade deal between the U.S. and China, reaching a high of 1.3353 yesterday and closing at 1.3335.

Several economists are joining hawkish members of the FOMC in the financial sector to warn against a cut in the fed funds rate at the latest meeting of the rate-setting committee, which will begin later today and end with its Chairman, Jerome Powell, announcing the decision at around 7 pm UK time tomorrow.

While interest futures markets are predicting a 94% chance of a cut, the hawks are concerned that the lack of reliable data due to the Federal shutdown means they will be “flying blind”.

The meeting is widely expected to result in another quarter-point cut, as the Central Bank seeks to keep unemployment from spiking amid economic uncertainty.

It comes as the Fed navigates a delicate balance between its two primary mandates, stable prices and maximum employment, amid forces pulling in both directions. On one hand, cutting rates too quickly or too soon could send inflation, while leaving them at a restrictive level for too long risks further weakening of the employment situation.

“Rising downside risks to employment have shifted our assessment of the balance of risks,” Powell said during a speech earlier this month. “There is no risk-free path for policy as we navigate the tension between our employment and inflation goals.” Officials are also trying to figure it out in a blackout of government economic data that helps inform their decision-making.

President Trump has hinted that a trade deal with China may be close. He reacted to Beijing's recent decision to limit exports of rare earths by increasing tariffs on goods from China imported to the U.S. to 100%.

US President Donald Trump is set to meet newly elected Japanese Prime Minister Sanae Takaichi in Tokyo. The visit is part of a five-day Asia trip, which he hopes to cap with a trade war truce with Chinese President Xi Jinping. China is the only one of America’s trading partners with whom Trump is willing to compromise, since he is aware of the delicate nature of the two superpowers’ relationship.

Treasury Secretary Scott Bessent told reporters yesterday the names of the five candidates from whom he believes the President will nominate the next Chairman of the Federal Reserve. He named the finalists one by one. They include current Fed Governors Christopher Waller and Michelle Bowman, National Economic Council Director Kevin Hassett, former Fed Governor Kevin Warsh, and BlackRock executive Rick Rieder. These names were already circulating earlier this month.

Bessent said he has already conducted several interviews and expects to run one more round after the Thanksgiving holiday. He said he plans to present what he called a “good slate” to Trump shortly after.

Trump also spoke on the same subject and emphasised the timeline. “We are looking to announce by the end of the year,” he said. Powell’s term ending in May leaves room for transition planning.

The dollar index reacted poorly to the news of a possible trade deal with China. It fell to a low of 98.73 and closed at 98.82.

There is zero speculation concerning a further cut in interest rates following the meeting of the ECB’s Governing Council this week.

The council will announce its decision on Thursday. The Central Bank’s Chief Economist told reporters last week that he does not want markets to become too comfortable predicting the outcomes of these meetings.

Several of its members have said they are satisfied that the battle with inflation has been won. The level of growth is appropriate for this stage of the economic cycle.

The ECB’s key deposit rate has been 2% since July, following a year-long series of cuts. Inflation has stabilised around the 2% target in recent months, and Europe has weathered US tariffs better than initially feared.

Meanwhile, France’s political crisis has increased borrowing costs in the eurozone’s second-largest economy, and the risk of renewed trade tensions remains. President Christine Lagarde said the ECB is “in a good place” and ready to respond if inflation risks or new economic shocks emerge. The upcoming Thursday meeting in Florence is expected to focus more on assessing the current situation than on taking action.

Credit growth to Eurozone firms slowed last month. Still, businesses remained optimistic about their prospects, even as profits are deteriorating and inflation could head higher, two separate European Central Bank surveys showed on Monday.

The Eurozone economy has proved resilient this year amid tariff uncertainty, but growth is still only about 1%, suggesting the economic gap with the U.S. will continue to widen.

"25% of firms remained optimistic about developments in the next quarter, more than in the previous quarter," the quarterly Survey on the Access to Finance of Enterprises showed. At the same time, firms continued to see a deterioration in their profits.

The survey also showed that inflation expectations were broadly steady, but firms expected price growth above the ECB's 2% target for years to come, even with a risk of acceleration.

Inflation has been around target for nearly all year, and the ECB itself sees it below 2% for most of the next two years, before rising back to target in 2027.

Median expectations for annual inflation one year ahead remained at 2.5%, while expectations for three and five years ahead remained at 3.0%," the ECB said. "For the five-year horizon, most firms continue to indicate that risks to the inflation outlook are tilted to the upside.

China and Germany sought to downplay suggestions of rising tension between the world's second and third-largest economies, after German Foreign Minister Johann Wadephul postponed his first trip to Beijing.

Wadephul was originally due in the Chinese capital from Sunday on the first visit by a minister of Chancellor Friedrich Merz’s government, but cancelled at the last minute after the Chinese acceded to just one of his meeting requests.

The cancellation came amid strained ties over Chinese export curbs on chips and rare earths that are harming the German economy and increasingly assertive comments from Berlin on China's support for Russia and its actions in the Indo-Pacific.

One senior German parliamentarian accused China of having provoked the cancellation out of a fear of debate. Others, however, said it would only stoke further tension and hurt Germany's economy, which is already facing a third year of contraction.

German deputy government spokesperson Steffen Meyer said Berlin remained interested in a “respectful and good exchange" with Beijing and did not see the postponement having "any major impact on the federal government’s further policy."

The euro saw relatively minor gains yesterday, as it continued to be driven by the dollar's price action. It reached a high of 1.1652 and closed at 1.1644.

Have a great day!