The UK will return to growth this year, but growth will not be strong enough to save the Labor government from raising taxes again before the next election, according to an annual Financial Times survey of economists.
The survey of 96 leading economists found that, although the UK is likely to overtake France and Germany in 2025, previously announced increases in business and personal taxes could undermine jobs and the wider economy.
Most economists expected only a tepid rate of expansion this year, less than the 2 percent rebound projected by the fiscal watchdog the Office for Budget Responsibility for 2025.
“The increase will undercut the government and the OBR’s forecasts,” said Maxime Darmet, senior economist at Allianz Trade. “Therefore, tax bills will probably be understated as well.”
All but a minority of respondents said UK Chancellor Rachel Reeves would end up raising taxes again before the next general election, expected in 2029, despite her protestations that Britain would not there was another big tax hike budget in this parliament.
Andrew Oswald, professor of economics and behavioral science at Warwick University, said there would be “a dawning realization . . . that without the income tax and the VAT increase, we cannot make the amounts work”.
Reeves, who took office warning that Labor had inherited “the worst circumstances since the Second World War”, increased employers’ national insurance contributions by £25bn in her Autumn Budget – a move which will enter effective in April.
“The government has chosen to scare business, which has hit confidence,” said Sir Howard Davies, professor of practice at the Paris Institute of Political Science (Sciences Po) 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 be better off 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 a negative impact from Trump’s policies in the UK.
Economists said UK growth would still lag behind the US as the temporary stimulus of higher government spending set in the budget faded and higher labor costs hit employers.
Wages will continue to rise in real terms, making people feel somewhat better, many economists said. However, they added that any improvement in sentiment would be limited because prices and borrowing costs were still high and the rising tax burden was fueling anxiety over job security.
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Fhaheen Khan, senior economist at manufacturers’ trade group Make UK, said increasing employers’ national insurance contributions would be “a tough pill to swallow” for industries whose costs had been rising for years with queue.
Stubborn inflation would also limit the Bank of England’s ability to cut interest rates and the UK would continue to suffer chronically weak investment and productivity, the survey found.
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The FT poll was closed before a series of data releases showed the scale of the challenge Reeves faces this year.
Growth went into reverse at the end of 2024, with GDP stagnating during the third quarter and contracting in October. At the same time, price pressures have continued and business sentiment has worsened.
Most economists think the return to growth will be helped by a premature increase in government spending and by consumers becoming more willing to spend their accumulated savings.
But forecasts compiled by Consensus Economics in December, ahead of the latest figures, found the median forecast among economists was for GDP growth of just 1.3 per cent in 2025. Most respondents to the FT poll had similar expectations.
Andrew Goodwin, chief UK economist at consultancy Oxford Economics, said the OBR had been “too bullish on the potential of the public sector to drive growth” in achieving its forecast of 2 per cent GDP growth for the year 2025.
Diane Coyle, a professor of public policy at the University of Cambridge, added that returning the economy to the growth rate it experienced before the 2008 financial crisis “would require much more investment in public services and infrastructure than she (Reeves) has budgeted for.” “.
Other respondents described Labour’s current plans, which mean growth in public service spending will slow significantly from 2026, as “unbelievable”, “unrealistically tight” and “politically unreliable”.
Closing the gap with additional public borrowing would be difficult, argued Paul Dales, at consultancy Capital Economics, who said the UK was “close to the limits” of what financial markets would tolerate.
The chancellor could choose to wait until later in parliament to raise taxes, given the political cost of such a quick turnaround.
Ray Barrell, emeritus professor at Brunel University, said any changes in 2025 were likely to be “subtle”, such as reforms to property tax, or tobacco and alcohol duties.
Ricardo Reis, professor of economics at the LSE, said that since the money had been set aside for investment projects that had not yet been announced, “these can always be canceled or postponed if there is a crisis”.
But some respondents said Reeves may choose to make unpopular changes sooner rather than later.
“Most chancellors go through the pain early in parliament,” noted Jonathan Haskel, 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 expected inflation to remain above the Bank of Albania’s target throughout the year, so the central bank would only take “small steps” to cut interest rates – which would keep the cost of government service higher than previous years.
Most economists did not see slightly higher inflation as a major problem for the economy. The bigger issue, according to Bart van Ark, director of Manchester University’s Productivity Institute, was that “price levels are still perceived as high, even after a correction in real wages”.
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Nick Bosanquet, a former Imperial College professor now at consultancy Aim for Health Success, said the “anxiety” about inflation meant “most households will be paying . . . but with a lot of worries about the future”.
Bronwyn Curtis, chairman of the TwentyFour Income Fund, added: “The main positive impact (of strong wage growth) is in the past and taxing the working population . . . it won’t make them feel better.”
Higher taxes should ultimately lead to better public services that will make households feel more secure, even if they are less able to spend, said Kate Barker, a former member of the monetary policy committee. of the BoE.
Simon Wells and Liz Martins, economists at HSBC, said the labor market was the “biggest unknown” for 2025, pointing to corporate plans to deal with the looming rise in employment costs by cutting the number of employees, automating, moving jobs offshore, squeezing wages or raising prices.
“All of this is negative for UK workers,” they added. “So the question is how the pain will spread.”
Additional reporting by Jim Pickard
