The upcoming Autumn Budget on 30 October 2024 will begin a process which will see taxes increased for the next three years, according to Allianz Trade – the trade credit and surety arm of Munich-based insurer Allianz.

Maxime Darmet, senior economist for the UK, France and the US at Allianz Trade, said the UK economy is picking up momentum – but warned that the upcoming government budget announcement would be a taste of things to come.

Although the insurance industry will be closely watching chancellor of the exchequer Rachel Reeves’ plans for taxation, Darmet noted that rather than looking to increase tax revenues, a curb on spending would have a more substantial and sustainable effect on the UK reducing its soaring debt.

He added that because of Labour’s election promise not to increase income tax, VAT or national insurance, Reeves’ hands were significantly tied.

“Income tax, VAT and national insurance make up a significant majority of the tax revenue for the UK and, as such, there are limited options for the ability to increase tax revenues,” Darmet explained.

“It is likely [that] the Treasury will target tax rebates and seek to increase other taxes, such as capital gains tax and inheritance tax.”

In terms of whether insurance premium tax (IPT) fell within the ranks of taxes that could be increased by the Treasury, Darmet said: “It is a tax and it is possible, but it has not been mentioned or referenced as an area where the government has a focus.”

However, Darmet added that there were serious issues with the use of tax hikes to fill revenue gaps.

“The issue with taxes is that you are still unsure as to how much they will exactly generate,” he explained.

“You cannot be sure of the revenue you will eventually receive, which makes it difficult to have any certainty over the result.

“However, if you want to reduce the deficit, then a reduction in spending is a better option.

“The market understands it – it can be more easily communicated and there is a certainty on the money that will be generated by these reductions.”

Tightening the purse strings

Darmet warned that businesses and individuals need to be braced for the UK to move to a period of austerity in the years ahead.

“We believe the country will see a period of austerity, with a reduction in spending and a need for increases in taxes,” he said.

“We expect there will be tax increases in 2025 and again in 2026 as the government looks to its fiscal plans.”

According to Darmet, the Labour government’s plans to boost housebuilding and invest in key infrastructure was a positive move, however.

He continued: “Investment in infrastructure will drive growth.

“The government has ambitious targets for new homes [and] is looking to relax the current planning processes to speed [up] the ability for councils to approve plans.

“New homes require new infrastructure – such as schools, GPs and transport – and this is a good way to drive growth.”

He said Allianz Trade is predicting that real gross domestic product (GDP) growth will peak next year at 1.7%, with higher taxes set to slow growth into 2026 down to a figure of 1.3%.

“Our view that GDP will grow to 1.7% is on the optimistic side of current projections,” Darmet explained.

“The government’s initiatives are broadly neutral in 2025, but [it plans] to support moderate growth through higher public investment.

“Nevertheless, UK public finances are weak and fiscal policy will start to tighten again from 2026.”