The UK will return to growth this year, but the improvement will not be strong enough to spare the Labor government from raising taxes again before the next election, according to an annual Financial Times poll of economists.
The survey of 96 senior economists found that although the UK is likely to overtake France and Germany in 2025, previously announced increases in corporate and individual taxes could undermine jobs and the wider economy. economy.
Most economists expected only a tepid expansion rate this year, less than the 2 percent recovery the Office for Budget Responsibility expected for 2025.
“Growth will be lower than the government and OMB forecasts,” said Maxime Darmit, chief economist at Allianz Trade. “So tax revenues will likely be below average as well.”
All but a few participants said the UK Chancellor Rachel Reeves She will eventually end up raising taxes again before the next general election, expected in 2029, despite her protests 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 increasing income tax and VAT, we can't make these damned amounts work.”
Reeves, who took office warning that Labor had inherited “the worst set of conditions since the Second World War”, increased national insurance contributions for employers by £25bn in its autumn budget – a move due to come into force in April ( April).
“The government has chosen to intimidate businesses, 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 due to the impact on confidence, the UK would remain “just outside the Champions League” in the G7 growth rankings.
The poll found that Britain's greater political stability and service-based economy means it will 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 of Trump's policies on the UK.
Economists said UK growth will continue to lag behind the US as temporary stimulus from increased government spending set in the Budget fades and rising labor costs weigh on employers.
Many economists said wages would continue to rise in real terms, making people feel somewhat better. But they added that any improvement in sentiment would be limited because prices and borrowing costs remain high, and the rising tax burden is fueling anxiety about job security.
Faheen Khan, chief economist at manufacturers' trade group Make UK, said the rise in employers' National Insurance contributions would be a “heavy pill to swallow” for industries whose costs have been rising for years.
Stubborn inflation will also limit the scope for the Bank of England to cut interest rates, and the UK will continue to suffer from chronic weakness in investment and productivity, the survey found.
The FT poll closed before a series of data appeared The scale of the challenge He faces Reeves this year.
Growth reversed at the end of 2024, with… GDP stops During the third quarter and contracting in October. At the same time, price pressures persisted and business sentiment deteriorated.
Most economists believe that a return to growth will be helped by a direct increase in government spending and by consumers becoming more willing to spend their accumulated savings.
But forecasts compiled by Consensus Economics in December, before the latest figures, found that the average forecast among economists was for GDP growth of just 1.3 per cent in 2025. Most respondents to the FT survey had Similar forecasts.
The Office for Budget Responsibility was “very optimistic about the ability of the public sector to drive growth” in reaching its forecast of a 2 per cent GDP increase for 2025, said Andrew Goodwin, chief UK economist at consultancy Oxford Economics.
Diane Coyle, professor of public policy at the University of Cambridge, added that returning the economy to the growth rate it saw before the 2008 financial crisis “will require much greater investment in public services and infrastructure than (Reeves) budgeted.”
Other participants described Labour's current plans, which imply that growth in spending on public services will slow sharply from 2026, as “unreasonable”, “unrealistically narrow” and “lacking political credibility”.
Bridging the gap with additional public borrowing will be difficult, said Paul Dales, at consultancy Capital Economics, who said the UK was “close to the limits” of what financial markets could bear.
The finance minister could choose to wait until later in parliament to raise taxes, given the political cost of such a rapid shift.
Any changes in 2025 are likely to be “subtle”, such as property tax reforms, or tobacco and alcohol duties, said Ray Burrell, emeritus professor at Brunel University.
Ricardo Reis, professor of economics at the London School of Economics, said that since the money has been allocated to investment projects that have not yet been announced, “it is always possible that they will be canceled or postponed if there is a crisis.”
But some participants said Reeves may choose to make unpopular changes sooner rather than later.
“Most advisers feel the pain early in Parliament,” noted 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 why government spending plans will come under pressure in 2025.
Most survey respondents said they also expect inflation to remain above the Bank of England's target throughout the year, so the central bank will only take “small steps” to lower interest rates – which would keep the cost of serving the government higher than in previous years.
Most economists did not see slightly higher inflation as a major problem for the economy. The biggest problem, according to Bart van Ark, director of the Productivity Institute at the University of Manchester, is that “price levels are still considered high, even after a correction in real wages.”
Nick Bosanquet, a former Imperial College professor who now works at consultancy Aiming for Health Success, said “concern” about inflation meant that “most households will be able to repay their debts…” . . But with a lot of concerns about the future.”
Bronwyn Curtis, head of the TwentyFour Income Trust, added: “The main positive effect (of strong wage growth) is in the past, and taxing the working population… is not going to make them feel better off.”
Kate Parker, a former member of the Bank of England's monetary policy committee, said higher taxes should ultimately lead to improved public services that will make households feel more secure, even if they are less able to spend.
Simon Wells and Liz Martins, economists at HSBC, said the labor market is the “biggest unknown” of 2025, pointing to companies’ plans to deal with the looming rise in hiring costs by cutting headcount, automating, offshoring, or Put pressure on or raise wages. Prices.
“All of these are negative for UK workers,” they added. “So the question is how will the pain spread.”
Additional reporting by Jim Pickard
