The United Kingdom is set to unveil its annual budget on Wednesday against a backdrop of poor public finances and widespread public discontent with the governing Labour Party.

UK Chancellor Rachel Reeves faces the onerous task of restoring the public finances to health, while upholding a number of pledges that leave her with little manoeuvring room on taxes and spending.

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Economists say that Reeves will have little choice but to compromise on her plans as she faces what a leading think tank has dubbed an “impossible trilemma”.

Why is this budget so challenging for the UK government?

The UK has struggled with weak economic growth, high inflation and a rapidly expanding national debt for years.

After Germany, the UK has had the weakest economic performance among the Group of Seven (G7) countries in the post-COVID era.

GDP grew just 1.7 percent from the final quarter of 2019 to the first quarter of 2024, compared with 8.7 percent in the US, 5.1 percent in Canada, and 4.6 percent in Italy, according to government data.

While Labour promised to revive the economy upon its election in a landslide victory in July last year, economic conditions continue to be difficult.

While the economy had a strong start to 2025 – putting the UK on track to be the best-performer in the G7 after the US – growth slowed to a meagre 0.1 percent in the quarter ending in September.

At the same time, the UK’s borrowing costs have soared, with the interest rate on long-term government bonds in September hitting its highest level in nearly 30 years.

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In October alone, the UK government borrowed 17.4 billion pounds to cover the gap between tax revenues and spending.

Reeves, whose Labour Party campaigned against spending cuts after years of austerity policies under the Conservatives, has made the already difficult task of drafting her budget more challenging with a number of self-imposed pledges.

Reeves’s “fiscal rules” dictate that the exchequer should balance day-to-day spending and reduce the national debt by 2029-30 – all without raising income tax, VAT or national insurance.

Reeves raised taxes by about 40 billion pounds ($52.6bn) in last year’s budget – the biggest hike in revenue-raising measures in decades – in what she cast as a one-off dose of pain needed to put the government’s finances on an even keel.

Despite the tax hikes, Reeves has once again found herself facing a major shortfall between spending and revenues amid the rising cost of government borrowing.

National Institute of Economic and Social Research, one of the UK’s top think tanks, estimated earlier this year that Reeves would need to find another 41.2 billion pounds to meet her targets – leaving her with the “impossible trilemma” of higher taxes, reduced spending or amended fiscal rules.

Other estimates, including more recent assessments based on improved economic data, have put the fiscal “black hole” closer to 20 billion pounds ($26.3bn).

“I do think it is a particularly challenging budget in that the Government is caught between their commitments to avoiding deep cuts to public services, not raising taxes for working people, and self-imposed fiscal rules and a jittery bond market,” Jasper Kenter, an economics professor at Aberystwyth University in Wales, told Al Jazeera.

“They are also suffering from major hangovers from the last government, who put in place significant tax cuts to national insurance shortly before they left as a failed electoral stunt.”

After backtracking on an income tax hike that would have broken Labour’s manifesto pledge, Reeves is expected to announce other revenue-raising measures, including a tax on properties worth more than 2 million pounds ($2.6m) and a freeze on adjustments to the income tax thresholds.

In the lead-up to the budget, Labour’s standing in the polls has plummeted, falling far behind the right-wing populist Reform UK.

Costas Milas, an economics professor at the University of Liverpool, said Reeves had exacerbated the UK’s economic difficulties with conflicting signals in the run-up to the budget.

“Investors are unwilling to invest in the economy until they see what economic measures she will actually implement,” Milas told Al Jazeera.

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“Consumers are also worried and therefore hesitant to consume and spend, at least until they see what extra taxes they will be faced with.”

Why has the UK economy struggled in recent years?

Some of the UK’s difficulties stem from factors shared by almost all developed economies, in particular, falling birth rates and rising welfare bills.

But more so than many of its peers, the UK has had a longstanding problem with low labour productivity growth.

In 2023, the UK’s labour productivity (GDP per hour worked) placed it fourth among the G7 nations.

However, productivity growth in the UK has lagged behind its peers in recent decades.

GDP per hour worked in the UK grew only about 6 percent from 2007 to 2022, according to OECD data, compared to 17 percent in the United States, 12 percent in Japan and 11 percent in Germany.

Economists have blamed the productivity gap on years of chronic underinvestment resulting from austerity policies introduced in the wake of the 2007-08 global financial crisis.

According to a PwC analysis of World Bank figures, the UK’s investment spending from 2017 to 2021 was equal to 18 percent of GDP, compared with 25 percent of GDP in Japan, 23 percent in France and 21 percent in the US.

Brexit has been widely blamed for exacerbating the post-financial crisis trend.

The UK’s Office for Budget Responsibility has estimated that the UK’s exit from the bloc will reduce long-term productivity by 4 percent.

Jonathan Daniel Portes, an economist at King’s College London, said the UK needed to tackle long-run structural problems, including by undertaking “pro-growth tax reform” and “reversing anti-growth policies on immigration and universities”.

“I expect significant tax rises but no major tax reform. I don’t think it will make a huge difference,” Portes told Al Jazeera, describing his expectations for the budget.

Michael Ben-Gad, a professor of economics at City St George’s, University of London, said the UK could benefit from tinkering with the tax system, but it will be unable to avoid reforms to its welfare state over the longer term.

“Pay-as-you-go national pension schemes were designed for a growing population or at least one that was stable,” Ben-Gad told Al Jazeera.

“No one anticipated either below replacement fertility or the lengthening of life-spans when modern welfare states were introduced.”