Starmer’s £7bn Pay Rise Plan Triggers Tax Hike Fears
Economists have warned that tax rises are becoming inevitable after Prime Minister Sir Keir Starmer unveiled £7 billion in pay increases for public sector workers—well above the current rate of inflation. The government announced that staff in the NHS, schools, and Armed Forces would receive inflation-busting pay awards of over 3.5 percent, with junior doctors seeing increases of up to 6 percent.
However, the Treasury reportedly committed to funding only up to 2.8 percent of these increases, leaving departments to cover the remaining costs. The resulting funding gap has sparked fresh concerns about how Labour plans to manage public finances amid weak economic growth and rising debt levels.
Ruth Gregory, deputy chief UK economist at Capital Economics, said: “Tax increases are starting to feel inevitable. This will only add to the Chancellor’s dilemma over increased spending pressures in an environment of low economic growth and high interest rates.”
Recent data from the Office for National Statistics (ONS) showed that government borrowing rose to £20.2 billion in April 2025—£1 billion more than the same period last year and the fourth-highest April figure since 1993. This surge in borrowing further strains Chancellor Rachel Reeves’s fiscal goals, including her pledge to pay for day-to-day government expenses through taxes rather than borrowing, and to reduce debt as a share of national income by 2029–30.
Despite Labour’s prior commitment to maintain fiscal discipline, the reversal of unpopular cuts—such as winter fuel payments—has raised questions about how new commitments will be funded. In a controversial U-turn, Sir Keir Starmer recently announced the reinstatement of broader winter fuel allowances after facing backlash from both Labour MPs and voters. Yet, he has not provided clarity on how the policy will be financed.
The tax burden is already at a historic high following Reeves’s Autumn 2024 budget, which introduced £40 billion in tax increases—the largest hike since 1993. These measures included higher National Insurance Contributions for employers, an increase in capital gains tax, and changes to stamp duty, pensions, and inheritance tax policies.
Now, with the added pressure of public sector pay hikes, the Chancellor may have no choice but to revisit further tax measures in the Autumn 2025 budget. Some within the party, such as Deputy Prime Minister Angela Rayner, are reportedly urging higher taxation, sparking divisions at the top levels of government.
Meanwhile, critics argue that the government’s spending spree could choke economic growth and overburden taxpayers. Gareth Davies, the shadow finance minister, accused Labour of handing out “billion-pound bungs to their union paymasters” and warned of further tax hikes as the inevitable result.
In response, a Downing Street spokesperson claimed that some departments had already found internal savings—such as reducing NHS management layers and switching energy providers in schools—to offset the cost of pay rises.
However, analysts remain skeptical that internal savings alone will be sufficient. With weaker economic growth forecast in the coming months, the government’s tax receipts are expected to fall, exacerbating the pressure on public finances.
The political fallout from Labour’s economic decisions continues to mount, as the public, businesses, and opposition parties brace for what many believe is a looming wave of tax increases to sustain the government’s ambitious spending plans.
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