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

Britain will return to growth this year, but the rise will not be strong enough to prevent the Labor government from raising taxes again before the next election, according to the Financial Times’ annual survey of economists.

The poll of 96 leading economists found that while the UK is likely to overtake France and Germany in 2025, previously announced tax rises on businesses and individuals could disrupt jobs and the wider range. home.

Most economists had expected only a weak pace of expansion this year, less than the 2 percent the Office for Budget Responsibility’s fiscal watchdog expected in 2025.

“Growth will allow the government and the OBR to forecast,” said Maxim Darmet, senior economist at Allianz Trade.

All but a few respondents said the UK chancellor Rachel Reeves He would raise taxes again before the next general election in 2029, despite his complaints that Britain will not have another big tax-raising budget in this parliament.

Andrew Oswald, professor of economics and behavioral science at the University of Warwick, said there would be a “dawning realization . . . that without an increase in income tax and VAT, we cannot use the damned money.”

Reeves, who took office warning that Labor had inherited “the worst circumstances since the second world war”, increased employers’ national insurance contributions by £25 billion in his autumn budget, which will come into force in April.

“The government has chosen to scare business, which has hit confidence,” said Sir Howard Davies, professor of practice at Sciences Po in Paris and former director of the London School of Economics.

He added that given the impact on confidence, the UK would remain “just outside the Champions League” in the G7 growth rankings.

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

Economists say UK growth will still lag behind the US as the temporary boost from higher government spending in the budget fades and higher labor costs hit employers.

Wages will still rise in real terms, making people feel better, many economists said. However, they added that any improvement in sentiment would be limited, as prices and borrowing costs remain high and the rising tax burden worries jobs. on safety.

Faheen Khan, senior economist at manufacturers’ trade group Make UK, said the rise in employers’ National Insurance contributions would be “a tough pill to swallow” for industries that have seen costs rise for years.

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

The FT survey was closed before a number of publications showed the data the scale of the challenge Against Reaves this year.

Growth slowed at the end of 2024, back to GDP stop during the third quarter and reduced in Oct. At the same time, pressure on prices continues and business sentiment is strained.

Most economists believe that the return of growth will be facilitated by the priority increase in government spending and the willingness of consumers to spend their accumulated savings.

But forecasts compiled by Consensus Economics in December, before the latest figures, showed economists’ average forecast was for GDP growth of just 1.3 per cent in 2025. Most respondents to the FT poll had similar expectations.

Andrew Goodwin, chief economist at consultancy Oxford Economics, said the OBR had “overestimated the potential of the public sector to drive growth” by reaching its forecast of 2 per cent GDP growth in 2025.

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

Other respondents described Labour’s current plans, which suggest that growth in public service spending will slow sharply from 2026, as “improbable”, “unrealistically tight” and “politically unreliable”.

Closing the gap with additional public borrowing will be difficult, argues Paul Dales, at consultancy Capital Economics, who says the UK is “close to the limits” of what financial markets will tolerate.

The chancellor could decide to wait until later in parliament to raise taxes, given the political cost of such a quick turnaround.

Brunel University professor emeritus Ray Burrell says any changes in 2025 are likely to 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 had been allocated for investment projects that had not yet been announced, “they could always be canceled or delayed if there was a crisis”.

But some respondents said Reeves might opt ​​for unpopular changes instead.

“Most chancellors go through the pain 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.

Slow growth is not the only reason government spending plans will come under pressure in 2025.

Most respondents said they also expect inflation to remain above the BoE’s target for the rest of the year, so the central bank will only take “baby steps” to lower interest rates, which would keep the cost of servicing the government in line with previous years.

Most economists did not see slightly higher inflation as a major problem for the economy, according to Bart van Ark, director of the Productivity Institute at the University of Manchester, that “the price level is still perceived to be high, even after real wages have been adjusted.”

Nick Bosanquet, a former professor at Imperial College who now works for the consultancy Aim for Health, said the “concern” about inflation meant that “most households will be solvent . . but with many concerns for the future.”

TwentyFour Income Fund President Bronwyn Curtis added: “The main positive effect [of strong wage growth] is in the past, and taxing the working population. . . won’t make them feel better.”

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

HSBC economists Simon Wells and Liz Martins say the labor market is the “biggest unknown” for 2025, pointing to corporate plans to deal with the looming rise in employment costs by cutting jobs, automating, moving jobs offshore, squeezing or raising wages. the prices.

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

Additional reporting by Jim Pickard