Green Budget 2025: Full report

Welcome to the IFS Green Budget 2025.

This year’s edition will be the first produced under my tenure as Director of IFS, and the first with Barclays since 2011. 

The fiscal outlook has worsened since the spring. Rising market expectations of long-term interest rates will push up forecast debt interest spending. Policy reversals by the government will mean higher spending on working-age and pensioner benefits. And the Office for Budget Responsibility is widely expected to downgrade its forecast for productivity growth, which would bring it closer to independent forecasters and the Bank of England. Given the Chancellor was already meeting her ‘iron-clad’ fiscal rules by only an extremely small margin in March, continuing to meet them will require tax rises or spending cuts.

Pencilling in unspecified cuts for the final year of the forecast would stretch credulity. Making meaningful cuts to departmental spending would require reopening budgets only set in the June Spending Review. But the government’s ability to deliver its desired public service improvements within those budgets already hinges on ambitious improvements in public sector productivity. A sensible path for defence spending to 2035, consistent with honouring the UK’s latest commitments to NATO, could well see defence spending plans for 2028–29 topped up. And there are areas where spending is increasing fast – not least spending on children receiving support for special educational needs and disabilities (SEND) in schools and through the benefit system, which we forecast could increase by a further £5 billion by 2029.

On benefits too, the government is facing pressure to spend more, not less, with speculation it will abolish the two-child limit and the household benefit cap. The government’s proposals to replace two existing contributory benefits with one new ‘unemployment insurance’ benefit could deliver fiscal savings by time-limiting the new benefit for those with health conditions – but announcing cuts and again failing to deliver them would further erode the Chancellor’s credibility. Gilt markets will be watching closely.

The Chancellor is widely expected to raise taxes. But she has a choice not only over how much tax to raise, but over how to raise it. Simply raising rates of existing taxes might appear easier, but relying on badly designed taxes to bring in additional revenue will bring unnecessary economic damage. There is an opportunity here to be bold and take steps towards a system that does less to impede growth and works better for us all. Setting out a plan to replace declining revenues from fuel duties would reinforce that ambition – and her credibility.

Harder choices now – through larger tax rises or deeper spending cuts – would make it less likely that the government finds itself confronting the same difficult position again in the spring.

This year, we are delighted to collaborate with Barclays. We are grateful both for its financial support for the Green Budget and for its chapters on the outlook for the UK economy and on the gilt market. These contributions, drawing on Barclays’s own research, provide superb insights and vital context for the rest of the Green Budget’s analysis.

We are also very grateful to the Nuffield Foundation for the ongoing funding it has provided to support the Green Budget. Our principal aims for the Green Budget are to influence policy and to inform the public debate. It is particularly appropriate, then, that it should be supported by the Nuffield Foundation, for which these are also central aims.

The continuing support that the Economic and Social Research Council (ESRC) provides for our ongoing research work via the Centre for the Microeconomic Analysis of Public Policy at IFS (ES/Z504634/1) underpins all our analysis in this collection and is gratefully acknowledged. 

Data from Understanding Society are available from the UK Data Service. Access to the Longitudinal Education Outcomes (LEO) data and data from the National Pupil Database (NPD) was provided by the Department for Education. This work contains statistical data from the Office for National Statistics (ONS), which are Crown Copyright. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. The work was carried out in the Secure Research Service, part of the Office for National Statistics. The data owners and suppliers bear no responsibility for the interpretation of the data in this report. 

As with all IFS publications, the views expressed are those of the named chapter authors and not of the Institute – which has no corporate views – or of the funders of the research.

Helen Miller
Director
Institute for Fiscal Studies 

About Barclays

Our vision is to be the UK-centred leader in global finance. We are a diversified bank with comprehensive UK consumer, corporate and wealth and private banking franchises, a leading investment bank and a strong, specialist US consumer bank. Through these five divisions, we are working together for a better financial future for our customers, clients, and communities.

For further information about Barclays, please visit home.barclays.
 

About the Nuffield Foundation

The Nuffield Foundation is an independent charitable trust with a mission to advance social well-being. It funds and undertakes rigorous research, encourages innovation and supports the use of sound evidence to inform social and economic policy, and improve people’s lives. The Nuffield Foundation is the founder and co-funder of the Nuffield Council on Bioethics, the Ada Lovelace Institute and the Nuffield Family Justice Observatory.

This project has been funded by the Nuffield Foundation, but the views expressed are those of the authors and not necessarily the Foundation.

Find out more at: www.nuffieldfoundation.org. 

Bluesky: @nuffieldfoundation.org, LinkedIn: Nuffield Foundation.
 

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The Institute for Fiscal Studies
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in association with and funded by

Barclays
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home.barclays

funded by

The Nuffield Foundation
100 St John Street
London EC1M 4EH
www.nuffieldfoundation.org

with support from

The Economic and Social Research Council (ESRC)
through the Centre for Microeconomic Analysis of Public Policy
(CPP, reference ES/Z504634/1)
Polaris House
North Star Avenue
Swindon SN2 1UJ
www.esrc.ac.uk

It is an honour to be partnering with the IFS on its iconic and influential Green Budget this year, for the first time in 14 years. The timing could not be better. The eyes of global markets, as well as households and businesses up and down the United Kingdom, will be on the Chancellor when she stands up to deliver her Budget on 26 November. As a global bank that has been a part of the UK economy for more than 300 years, Barclays is uniquely placed to bring our insights and analysis to complement IFS’s world-renowned fiscal expertise.

Chancellor Reeves faces a challenging task with this Budget. She must find a way to meet her fiscal rules and maintain the confidence of financial markets without derailing a plan for growth that will raise productivity and deliver sustainable long-term increases in living standards for the UK. This is made no easier by a backdrop of high inflation and decelerating economic growth. In that context, it is hard to overstate the importance of this Budget in setting the UK on the right path and avoiding the potential pitfalls on either side.

In the two chapters we have contributed, our expert economists and researchers lay out what they see as a realistic path to a positive medium-term outlook being achieved and the risks along the way. They stress the importance of adhering to the current fiscal rules and not conducting any consolidation through levers that will add to inflation. They highlight the need for the UK’s private sector, its consumers and businesses, to take the baton as the drivers of growth, spurred by productivity rather than solely population growth. In addition, they demonstrate that the UK’s underlying fiscal fundamentals are in good shape, and can continue to be so if the Chancellor is able to make the difficult decisions required on 26 November. In a world of heightened global uncertainty and political and economic volatility, we recognise that these are not easy choices for the UK, but demonstrate that they can provide measurable benefits.

I would like to thank Jack Meaning, Moyeen Islam and Cian Hennigan for their work in putting these chapters together and leading Barclays’ research on the UK economy. And I would like to thank IFS for the opportunity to collaborate with them at such a pivotal moment.

Brad Rogoff 
Global Head of Research 
Barclays

The Nuffield Foundation is an independent institution that funds and undertakes rigorous 
research, encourages innovation and supports the use of sound evidence to improve people’s 
lives.

A key part of our purpose is to help build a society that is prosperous and fair, where 
people are secure and can fulfil their potential, supported by institutions that are effective 
and trustworthy. The IFS Green Budget advances these interests by providing forensic, 
independent and timely analysis of the UK’s fiscal position and some of the central social and 
economic choices facing the government.

Over the years the Green Budget has become a highly respected – and much anticipated – 
point of reference for assessing the key fiscal decisions facing any British government. By 
supporting it, the Foundation helps ensure that fiscal policy is guided by the best available 
evidence and that public debate on key policy choices is rooted in rigorous analysis. It is a 
publication that matters, and our national conversation would be poorer without it.

This year’s edition – not surprisingly – explores key options for raising additional revenue at 
the same time as improving the efficiency of our creaking tax system. But it also illuminates 
some of the other underlying social and economic challenges of our time: for instance, the 
challenges facing support systems for children with disabilities and special educational needs; 
how best to provide security and opportunity for the unemployed; and the urgent need for 
improved public sector productivity. All these topics strongly align with our mission.

The Green Budget continues to play a vital role in informing and scrutinising government 
decisions, equipping not just policymakers but also those in politics, media, business and civil 
society with new insights, and thereby promoting transparency and accountability.

As the nation’s fiscal challenges become starker, and our governing institutions are put under 
pressure, this external scrutiny is perhaps more vital than ever. We are proud to continue to 
support it.

Gavin Kelly 
Chief Executive 
Nuffield Foundation

Ahead of the Autumn Budget, the UK economy stands at a pivotal juncture, with growth decelerating, unemployment rising and inflation above target. 

Read the full chapter here. 

Against a challenging backdrop, the Budget will be a key moment to announce measures needed to maintain and bolster bond market confidence. 

Read the full chapter here.

We set out the challenges facing the Chancellor from a changing economic and policy outlook, and explore options to stabilise policy going forwards.

Read the full chapter here. 

If the Chancellor hopes to raise large sums from tax increases at the Budget, she should consider reforms that would make any increases less damaging.

Read the full chapter here. 

How do trends, demographics and outcomes of children receiving support for health conditions compare across the benefits and education systems?

Read the full chapter here. 

We examine the government’s plans for public sector productivity and consider their fiscal and economic implications. 

Full the full chapter here. 

We examine the past and future of UK defence spending, considering the fiscal and economic consequences of the government’s commitments.

Read the full chapter here. 

The government’s reform to contributory benefits rewards jobseekers at expense of those with long-term disabilities, and could save billions annually.

Read the full chapter here.