As British Chancellor of the Exchequer Rachel Reeves MP prepares to deliver her Budget on 26 November 2025, Northern Ireland’s political and economic circles are bracing for a tight fiscal settlement from Westminster that sets the tone for another year of constrained public finances.
For Reeves, the challenge is trying to account for lower-than-expected growth since Labour’s election victory in July 2024, which has thrown her pre-election vision of “modern supply-side economics”, where spending can grow based on growth, into the long grass.
For Northern Ireland, the challenge is local and acute. The region’s dependence on Treasury transfers means that every decision taken in Whitehall reverberates through Stormont’s accounts, determining how far public services can stretch in 2026 and beyond.
The Chancellor is set to introduce revenue-raising measures, meaning she has to walk a tightrope between keeping to her self-imposed fiscal rules while keeping an election promise to not raise taxes on “working people”.
Reeves has tied herself to two fiscal anchors: ensuring that debt falls as a share of GDP and ending borrowing for day-to-day spending within this parliament. The Financial Times reports that Treasury officials have accepted that, under current forecasts, those rules leave a hole of between £20 billion and £50 billion in the public finances. The choices to keep within Reeves’s fiscal rules are between higher taxes, slower spending growth, or optimistic assumptions on productivity.
Economists expect the Chancellor to pursue the least politically toxic route: allowing frozen income tax and national insurance thresholds to do the heavy lifting. The policy, introduced by her predecessors, quietly drags more workers into higher tax bands as wages rise, delivering billions in extra revenue without an explicit rate increase.
For Northern Ireland, where median earnings are roughly 12 per cent below the UK average, the impact will be uneven. Many households will remain below the higher-rate threshold, but many public sector staff a large share of the regional workforce would fall into this tax bracket.
Risk of real-terms squeeze
The more consequential issue for Northern Ireland lies in spending. With little fiscal headroom, Reeves is expected to limit real-terms growth in departmental budgets. The Office for Budget Responsibility (OBR) has already warned that the existing spending plans imply “material” cuts once inflation and demographic pressures are accounted for.
Because the Northern Ireland Executive receives about 90 per cent of its funding through the Treasury’s block grant, slower growth in Whitehall allocations translates directly into smaller Barnett consequentials. The result could be another year in which the Executive faces choices between pay settlements, service delivery, and capital projects.
A recent review by economist Gerald Holtham estimated that Northern Ireland’s relative spending need, adjusted for demography, deprivation, and geography, is about 128 per cent of the English average. However, the Northern Ireland Fiscal Council has warned that the current baseline falls short of that level, leaving structural under-funding even before inflation and wage pressures are considered.
Markets and think tanks are watching for signs that Reeves might combine fiscal tightening with structural reform. Possible measures include aligning capital gains tax more closely with income tax rates, narrowing pension tax reliefs, and reshaping stamp duty. Such steps would be framed as improving “fairness” and efficiency rather than pure revenue-raising, but collectively they could contribute several billion pounds to Treasury coffers.
Northern Ireland’s economy, with its older demographic and lower property values, would experience these reforms differently from Britain. Pension relief changes would weigh more heavily on the region’s retirees, while property-related reforms might deliver smaller cash impacts but proportionally larger shifts for first-time buyers.
Productivity
Underpinning Northern Ireland’s fiscal vulnerability is its chronic productivity gap. Output per worker remains around 20 per cent below the UK average, according to the ONS. Employment growth has been modest, and the tax base correspondingly weak. These dynamics limit the region’s capacity to raise revenue and make it especially sensitive to Westminster’s fiscal choices.
The Executive’s limited fiscal autonomy exacerbates the challenge. Unlike Scotland, Northern Ireland has no power to vary income tax rates or thresholds and this is not on the Executive’s agenda. Proposals for modest local revenue-raising, through regional rates or specific levies, remain politically contentious and economically narrow.
Commentary
Speaking to agendaNi, deputy First Minister Emma Little-Pengelly says: “I have said very clearly to the Chancellor that… she needs a budget that supports economic growth, and she needs a budget that supports business. We have not seen that from her so far.
“She has another budget event coming up at the end of November, and we are urging her very strongly to seize the opportunity of that budget to provide a plan for economic growth across the UK.”
Speaking in the Assembly, Finance Minister John O’Dowd MLA said that he had “listened carefully” to Reeves’s speech on 4 November, which suggested that taxes were to go up in the Budget.
He added: “The question that has not been answered thus far is who is that tax burden going to fall on.”
