LONDON — More than a year after UK finance minister Rachel Reeves delivered her first budget — the most tax-heavy budget in over three decades — Britain’s economy is showing a mixed and increasingly fragile recovery. While early 2025 brought a burst of momentum, growth has since slowed sharply as businesses and consumers brace for additional tax increases expected in Reeves’ upcoming fiscal plan.
Early Momentum, Then a Sudden Slowdown
According to the International Monetary Fund, the United Kingdom is still on track to record the second-fastest GDP growth among G7 economies in 2025, behind only the United States. The IMF also projects the UK will post the third-fastest growth in 2026.
But recent data tells a more cautious story. The economy expanded by only 0.1% in the third quarter, dragged down partly by a major cyberattack on Jaguar Land Rover that caused widespread supply chain disruptions.
Forward-looking PMI business surveys indicate the fourth quarter may not be much better, with analysts predicting growth of just 0.1% as companies brace for fresh tax hikes.
Labour Market Begins to Soften
Reeves’ 2024 budget raised the minimum wage and sharply increased employers’ social security contributions — two policies that firms say have pressured their margins and hiring plans.
Official data shows:
- Payrolls in September and October posted the sharpest two-month drop since late 2020.
- The unemployment rate climbed to 5.0%, the highest reading since early 2021.
- Real wages (inflation-adjusted) rose just 0.5% year-on-year in Q3, signaling pay growth is losing steam.
The Bank of England believes the worst effects of the 2024 tax shock have passed, but economists warn that labour demand remains weak heading into 2026.
Consumer Spending Cools
Consumer behavior has also shifted. Retail sales slipped in October, the first monthly decline since May, with major chains reporting more cautious shoppers ahead of Black Friday and holiday promotions.
The GfK consumer confidence index dipped in November, while the British Retail Consortium recorded the steepest drop in shopper sentiment since April. Retailers say lingering uncertainty over Reeves’ next budget is contributing to a more hesitant consumer mood.
Inflation Falling — But Not Fast Enough
Inflation remains a thorny problem for the Labour government. After hitting 2.3% in October 2024, headline inflation surged back to 3.8% during July through September of this year, driven in part by Reeves’ employer-tax increases.
Inflation eased to 3.6% last month, but it remains nearly double the Bank of England’s 2% target. Core inflation and services inflation both fell in October, offering policy makers a small but welcome sign that underlying pressures may be easing.
Reeves has signaled she intends to cut value-added tax (VAT) on household energy bills in a bid to help bring prices down.
Interest Rates Still High
The Bank of England has cut interest rates five times since Labour came to power in July 2024, but the benchmark Bank Rate remains at 4% — still twice as high as the European Central Bank’s policy rate.
High borrowing costs continue to weigh on investment and consumer credit, further complicating the economic outlook.
