The UK is headed for a tax hike despite a return to growth, economists say

The UK 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 annual survey of Financial Times of economists.

A survey of 96 leading economists found that, although the UK may overtake France and Germany by 2025, earlier announced tax increases on businesses and individuals could cut jobs further. the economy.

Most economists had expected a faster rate of growth this year, just short of the 2 percent return the Bureau of Financial Accountability expected for 2025.

“Growth will lower the government and the OBR’s expectations,” said Maxime Darmet, chief economist at Allianz Trade. “Therefore, tax receipts will also decrease.”

All but a few respondents mentioned the UK Chancellor Rachel Reeves would finally raise taxes again before the next general election, expected in 2029, although he has protested that Britain will not have another big Budget tax hike this parliament.

Andrew Oswald, a professor of economics and behavioral science at the University of Warwick, said there would be a “dawning realization . . . that without the increase in income tax and VAT, we will not make the hard money work”.

Reeves, who warned that Labor had inherited “the worst situation since the second world war”, increased employers’ national insurance contributions by £25bn in his Budget autumn – the phase will start working in April.

Sir Howard Davies, professor of practice at the Paris Institute of Political Science (Science Po) and former director of the London School of Economics, says: “The government has chosen to scare business, which has created confidence.”

He added that, based on the impact on self-confidence, the UK would remain “outside the Champions League” in the G7’s growth rankings.

Britain’s greater political stability and service-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, the survey found. However, many economists expected a negative impact from Trump’s policies on the UK.

Economists have said that UK growth will continue to lag behind the US as the temporary boost to higher government spending set in the Budget fades and higher labor costs hit employers.

Wages are rising in real terms, leading people to feel better, many economists said. However, they added that any improvement in sentiment would be limited because rates and borrowing costs were still high and the growing tax burden was causing concerns about job security.

Fhaheen Khan, senior economist at manufacturers’ trade group Make UK, said the rise in employers’ national insurance contributions would be a “tough pill” for industries whose costs are rising with age.

Stubborn prices could also reduce the Bank of England’s room to cut interest rates and the UK will continue to suffer long-term investment and productivity, the study found.

The FT survey was closed before a series of data releases appeared the size of the challenge face Reeves this year.

Growth reversed at the end of 2024, by GDP figure during the third quarter and contracted in October. At the same time, price pressures have been slow and business sentiment has worsened.

Most economists think that the return to growth will be helped by a further increase in government spending and consumers willing to spend their savings.

But a forecast compiled by Consensus Economics in December, ahead of the latest figures, found that the average forecast 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 “very bullish on the potential for the public sector to drive growth” to meet its 2% increase forecast. % of GDP for 2025.

Diane Coyle, a professor of public policy at Cambridge University, added that returning the economy to the growth rate it enjoyed before the 2008 financial crisis, “will require significant investment in public services and infrastructure.” more public service than (Reeves) intended”.

Some respondents described Labour’s current plans, which state that growth in public service spending will slow significantly from 2026, as “unreasonable,” “unreasonably tight” ” and “politically dishonest”.

Bridging the gap by borrowing more money will be difficult, said Paul Dales, at Capital Economics, who said the UK was “close to the limits” of what the financial markets will tolerate.

The chancellor may choose to wait until later in parliament to raise taxes, given the political costs of such a quick U-turn.

Ray Barrell, distinguished professor at Brunel University, said any changes by 2025 would likely be “subtle”, such as changes to property tax, or to tobacco and alcohol duties.

Ricardo Reis, professor of economics at LSE, said that since the money was set aside for investment projects that had not yet been announced, “these could be canceled or postponed in case of problems”.

But some respondents said Reeves may prefer to make unpopular changes sooner rather than later.

Jonathan Haskel, a professor at Imperial College, London and a former member of the Bank of England’s Monetary Policy Committee, observed: “Many Chancellors are quick to soften in parliament.

Slow growth isn’t the only reason government spending plans are under pressure in 2025.

The majority of survey respondents said they also expect inflation to remain above the BoE’s target throughout the year, so the central bank will only take “baby steps” to cut interest rates – which will save the cost of to work for the government are higher than in previous years.

Most economists do not see mild inflation as a major problem in the economy. The bigger issue, according to Bart van Ark, director of the University of Manchester’s Productivity Centre, was that “price levels are still considered high, even after adjusting for real wages”.

Nick Bosanquet, a former professor at Imperial College who is now at the consultancy Center for Health Success, said the “concern” about rising prices means “many families will be exempt . . . but with many worries for the future”.

Bronwyn Curtis, chairman of the TwentyFour Income Fund, added: “The main positive explanation (of strong income growth) is the past, and taxing the working people . . . it won’t make them feel better.”

Higher taxes must eventually lead to better public services that will make households feel more secure, even if they can’t spend, said Kate Barker, a former member of the BoE’s monetary policy committee. .

Simon Wells and Liz Martins, economists at HSBC, say the labor market is “the most uncertain” for 2025, pointing to business plans to deal with future increases in labor costs by downsizing. many, to automate, to outsource, to suppress wages or to raise. prices.

“All of this is of no use to UK workers,” they added. “So the question is how will the pain spread.”

Additional reporting by Jim Pickard