According to an annual Financial Times poll of economists, the UK is expected to return to growth this year. However, the upturn may not be strong enough to prevent the Labour government from raising taxes again before the next election.
The survey of 96 leading economists revealed concerns that previously announced tax increases could have negative effects on jobs and the wider economy, despite the UK likely outperforming France and Germany in 2025.
Most economists predicted only a modest rate of expansion in the upcoming year, falling short of the 2% rebound anticipated by the Office for Budget Responsibility. This could lead to lower tax receipts than expected.
It was widely agreed that UK Chancellor Rachel Reeves would likely need to implement further tax hikes before the next general election in 2029, despite her earlier assurances that major tax increases would not occur during this parliament.
Experts expressed concerns that without additional income tax and VAT rises, the government may struggle to meet financial targets. Reeves has already increased employers’ national insurance contributions in her latest budget.
Despite the UK’s projected better performance compared to France and Germany in 2025, economists warned of potential negative impacts from US tariffs threatened by president-elect Donald Trump.
Although wages are expected to rise in real terms, leading to some improvement in living standards, the rising tax burden, high prices, and borrowing costs could still cause anxiety over job security.
Business leaders emphasized the need for the government to reduce the overall tax burden on companies and create a more growth-friendly regulatory environment to attract investment.
As the data showed economic challenges ahead, experts suggested that the government’s growth forecasts may be too optimistic and that more investments in public services and infrastructure are necessary to achieve sustained growth.
While some economists considered the option of increased public borrowing to fill the gap, others warned that the UK may be reaching the limit of what financial markets would tolerate.
Given the potential political backlash, the chancellor may opt for subtle changes to taxation policies in 2025, such as property tax reforms or adjustments to duties on tobacco and alcohol.
Overall, the economic outlook for the UK remains uncertain, with potential challenges ahead that may require difficult decisions from policymakers.
Jonathan Haskel, a former member of the Bank of England’s Monetary Policy Committee and a professor at Imperial College, London, pointed out that most chancellors experience the pain early in parliament.
In 2025, the government’s spending plans are expected to face pressure not only due to slow growth but also because most survey respondents anticipate inflation to remain above the BoE’s target throughout the year. This would result in the central bank taking only small steps to lower interest rates, leading to higher government servicing costs compared to previous years.
Economists are not overly concerned about slightly higher inflation levels. The larger issue, as noted by Bart van Ark from Manchester University’s Productivity Institute, is that price levels are still perceived as high despite a correction in real wages.
Nick Bosanquet, from the consultancy Aiming for Health Success and a former professor at Imperial College, expressed that “anxiety” surrounding inflation would lead to households feeling solvent but with concerns for the future.
Higher taxes are expected to result in improved public services, providing households with a sense of security, even if their spending ability is reduced, according to Kate Barker, a former member of the BoE’s monetary policy committee.
HSBC economists Simon Wells and Liz Martins highlighted the uncertainty surrounding the labor market in 2025, with corporate plans to offset rising employment costs by reducing headcount, automating processes, outsourcing jobs, suppressing wages, or increasing prices. They emphasized the negative impact of these actions on UK workers and questioned how the repercussions would be distributed.
Additional reporting by Jim Pickard