UK heading for tax rises despite return to growth, economists say

The UK will return to growth this year but the upturn will not be strong enough to spare the Labor government raising taxes again before the next election, according to the Financial Times’ annual survey of economists.

The survey of 96 leading economists found that, although the UK could overtake France and Germany in 2025, previously announced tax increases on businesses and individuals could reduce jobs and expansion. the economy.

Most economists had expected only an expansion rate this year, less than the 2 percent the Office for Budget Responsibility expects for 2025.

“Growth will undercut the government’s and OBR’s forecasts,” said Maxim Dermet, senior economist at Allianz Trade. “Hence, tax receipts will also likely be lower.”

All but a few respondents are Chancellor of the United Kingdom Rachel Reeves It will raise taxes again before the next general election, expected in 2029, despite protests that Britain will not have another big tax-raising budget this parliament.

Andrew Oswald, Professor of Economics and Behavioral Sciences at the University of Warwick, said, “There will be an emerging realization … that without an increase in income tax and VAT, we can’t do a damn thing”.

Reeves, who warned in office that Labor had inherited “the worst situation since the Second World War”, increased employers’ National Insurance contributions by £25bn in his autumn budget – to come into effect in April.

“The government has chosen to scare business, which has hurt confidence,” said Sir Howard Davies, former director of the Paris Institute of Political Science (Sciences Po) and the London School of Economics.

He added that, given the impact on confidence, the UK would be “out of the Champions League” in the G7 growth rankings.

Britain’s greater political stability and services-based economy mean it will fare better in 2025 than France and Germany, which could be hit harder by potential US tariffs threatened by President-elect Donald Trump, the survey found. However, most economists expected some negative impact from Trump’s policies in the UK.

Economists said UK growth would still lag behind the US as the temporary stimulus from higher government spending set in the Budget faded and higher labor costs hit employers.

Many economists say wages will still rise in real terms, making people somewhat better off. However, they added that people will not experience much improvement as prices and borrowing costs are still high and rising tax burdens are raising concerns about job security.

Faheen Khan, senior economist at manufacturer trade group Make UK, said the rise in employers’ National Insurance contributions would be a “big pill to swallow” for an industry whose costs have been rising for years.

Stubborn inflation will also limit the Bank of England’s scope to cut interest rates, and the UK will continue to suffer from weak investment and productivity, the study found.

The FT’s survey featured a series of revelations before it closed The scale of the challenge Facing Reeves this year.

Growth reverses towards the end of 2024 GDP stagnates In the third quarter and at the same time as contracts in October, price pressures have lingered and business sentiment has worsened.

Most economists think the return to growth will be helped by an increase in government spending and as consumers become more willing to spend their savings.

But in forecasts compiled by Consensus Economics in December, ahead of the latest figures, the average prediction among economists was for GDP growth of just 1.3 percent in 2025. Most respondents to the FT survey had similar expectations.

Andrew Goodwin, chief UK economist at consultancy Oxford Economics, said the OBR was “too bullish on the public sector’s potential to drive growth” in reaching its forecast of 2 per cent GDP growth for 2025.

Diane Coyle, a professor of public policy at Cambridge University, added that returning the economy to the growth rates it experienced before the 2008 financial crisis would require “a lot more investment in public services and infrastructure than it did.” [Reeves] has been budgeted for”.

Other respondents described Labour’s current plans, which imply that growth in public service spending will slow sharply from 2026, as “unimaginable”, “unrealistically tight” and “not politically credible”.

It would be difficult to close the gap with additional public borrowing, argued Paul Dales of consultancy Capital Economics, who said the UK was “close to the limit” of what financial markets would tolerate.

Given the political costs of such a quick U-turn, the Chancellor may choose to wait until later in Parliament to raise taxes.

Ray Barrell, emeritus professor at Brunel University, said any changes in 2025 would likely be “subtle”, such as reforms to property taxes, or taxes on tobacco and alcohol.

Ricardo Reis, professor of economics at the LSE, said that because money is earmarked for investment projects that have yet to be announced, “they can always be canceled or postponed if there is a crisis”.

But some respondents said Reeves may choose not to make the unpopular changes sooner.

“Most chancellors get hurt early in Parliament,” notes Jonathan Haskell, a professor at Imperial College London and a former member of the Bank of England’s monetary policy committee.

Slower growth isn’t the only reason the government’s spending plan is under pressure in 2025.

Most survey respondents said they also expected inflation to remain above the BoE’s target for the rest of the year, so the central bank would take only “baby steps” to cut interest rates – which would keep government service costs higher than in previous years.

Most economists do not see inflation as a major problem for the economy. According to Bert van Ark, director of Manchester University’s Productivity Institute, the bigger problem was that “price levels are still perceived as high, even after corrections to real wages”.

Nick Bosanquet, a former Imperial College professor now consultant at Health Success, said “concerns” about inflation meant “most families would be fine . . . but with a lot of concern for the future”.

Bronwyn Curtis, chair of Twentyfour Income Fund, added: “The major positive impact [of strong wage growth] has in the past, and is taxing the working population. . . Don’t make them feel good.”

Higher taxes will ultimately lead to better public services that will make households feel more secure, even if they are able to spend less, said Kate Barker, a former member of the BoE’s monetary policy committee.

HSBC economists Simon Wells and Liz Martins said the labor market was the “biggest unknown” for 2025, pointing to corporate plans to deal with impending increases in employment costs by reducing headcount, automating, moving jobs offshore, cutting or raising wages. the price

“These are all negatives for UK workers,” they added. “So the question is how the pain will spread.”

Additional reporting by Jim Pickard