The chancellor will need to raise taxes by £25bn if she wants to keep spending rising with national income, according to the Institute for Fiscal Studies (IFS).

In its annual ‘Green Budget’ analysis, the IFS warned that the government would have to dramatically increase the £9bn of tax rises outlined in its manifesto to meet the pressures on public services.

The chancellor is likely to stick to her fiscal rule, which requires day-to-day spending to be met by tax revenues. This means she cannot increase borrowing to fill the gap.

Rachel Reeves will present her first budget in the Commons on 30 October. Paul Johnson, director of the IFS, said this budget could be “the most consequential since at least 2010”.

The new Labour government has already pledged in its manifesto to increase government budgets by £5bn and is spending £9bn to settle public sector pay disputes.

If Labour makes no further changes to the spending envelope, which was outlined by the previous government in 2021, it would register a surplus of £17bn.

However, those spending plans are considered wildly unrealistic and would involve real term cuts to unprotected budgets.

There is very little appetite for further cuts to public spending, so the chancellor could protect those budgets from inflation. That would leave her with a surplus of £1bn.

However, if she opted to protect spending as a share of national income – which better reflects population increase – she would record a deficit of £16bn.

That combined with the £9bn of tax rises already promised would see taxes increase by £25bn, further adding to a tax burden which is at a generational high.

It would be bigger than the net tax rises recorded in July 1997 and October 2010, which were both around £13-£14bn.

The government has also penned itself in by promising not to raise income tax and corporation tax or to increase National Insurance or VAT.

The IFS said that, even if Labour’s planned £9bn tax rise is implemented, trying to balance the current budget while avoiding cuts to public service spending would put the budget “on a knife edge” and highly sensitive to OBR judgments.

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It said the chancellor has inherited an “unenviable” public finance situation as taxes are already at a historic high and debt is rising, while public services such as prisons, police and local councils are under strain.

Mr Johnson, said: “The first budget of this new administration could be the most consequential since at least 2010… Taxes are at an all-time high, and she is tightly constrained by her pledges not to raise the main rates of income tax or corporation tax, or to increase National Insurance or VAT at all.

“The temptation then is to borrow more, perhaps changing the definition of debt targeted by the fiscal rules. But, given her pledge to balance the current budget, that would not free up additional resource for day-to-day spending.”

Major employment reforms promised by Labour will not become law for at least two years, as the government seeks compromise between unions and businesses on measures intended to strengthen workers rights without hindering economic growth.

The Employment Rights Bill, introduced into parliament on Thursday, includes 28 measures, many of which will be subject to extended consultation, while more than 30 other pledges have no clear timetable for delivery.

The major package of reforms includes granting workers protection from unfair dismissal from the first day of their employment, ending the existing two-year qualifying period.

The measure will be accompanied by a statutory probation period of up to nine months for new hires, during which staff can be dismissed under a “lighter touch” process.

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The consultation required means officials do not expect the measures to reach the statute book until autumn 2026 at the earliest.

Other measures in the bill include:

• The right to statutory sick pay from the first day of illness, ending the current three day waiting period, and removing the lower earnings limit
• Day-one rights to paid and unpaid paternity leave. Currently fathers have to be employed for 26 or 52 weeks respectively to receive the benefits, and there will be a new statutory right to bereavement leave
• The right to flexible working. Where employers say no they will have to demonstrate the decision is reasonable against eight criteria
• A ban on “exploitative zero hours contracts”. Workers on zero or short-hours contracts will have to be offered a contract based on the hours worked in a 12 week reference period, receive notice of shift patterns and entitlement to payment for short-notice cancellation

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Among the measures excluded from the Bill is the introduction of a single category of worker, a measure long-promised by Labour and seen by unions as crucial to ending exploitation and inequality in the gig economy.

Currently there are broadly three categories; employee, worker and self-employed, with many gig-economy providers such as food delivery and ride-hailing apps classifying workers as self-employed, denying them access to sick pay and other benefits.

The “right to switch off”, which would have prevented employers contacting staff outside working hours, has also been left out, and will instead be subject to an agreed code of conduct.

The bill and delayed timetable for other reforms has already been the subject of extended debate and consultation between the new government, unions and business groups wary of the additional cost arising from the reforms.

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Despite a programme and timetable that may disappoint some in the union movement, ministers believe it strikes the right balance between improving the lot of workers, and incentivising the economic growth on which its wider programme relies.

Deputy Prime Minister Angela Rayner said: “This government is delivering the biggest upgrade to rights at work for a generation, boosting pay and productivity with employment laws fit for a modern economy. We’re turning the page on an economy riven with insecurity, ravaged by dire productivity and blighted by low pay.”

Jonathan Reynolds, the business secretary, said: “The best employers know that employees are more productive when they are happy at work. That is why it’s vital to give employers the flexibility they need to grow whilst ending unscrupulous and unfair practices.”