The Financial Times’ annual poll of economists says Britain will return to growth this year, but the turnaround is not strong enough to prevent a Labor government from raising taxes again before the next election.
The survey of 96 leading economists found that although the UK is likely to outperform France and Germany in 2025, previously announced tax increases on businesses and individuals could hurt jobs and the economy as a whole. It turned out.
Most economists expect the economy to expand at a slower pace this year, falling short of the 2% recovery expected by the Office of the Fiscal Watch in 2025.
“Growth will be lower than expected by the government and the OBR,” said Maxime Darmet, senior economist at Allianz Trade. “Therefore, tax revenues will probably also be lower.”
British Prime Minister Rachel Reeves has warned that Britain will raise taxes again before the next general election, expected in 2029, despite protests that the country will not budget for another major tax increase this parliament. , said all but a few respondents.
“There will be new awareness,” said Andrew Oswald, professor of economics and behavioral sciences at the University of Warwick. . . Unless income tax and value added tax go up, we will not be able to effectively spend this terrible amount of money. ”
Mr Reeves, who took office warning that Labor had inherited the “worst situation since the Second World War”, will increase national insurance contributions for employers by £25bn in his autumn budget, which will take effect in April. It was.
“The government has chosen to scare business, and that has hurt trust,” said Sir Howard Davies, professor of practice at the Paris Institute of Political Science and former director of the London School of Economics.
He added that the UK would remain “just outside the Champions League” in the G7 growth rankings given the impact on confidence.
The UK has greater political stability and a service-based economy, so it is likely to be hit harder by possible US tariffs threatened by President-elect Donald Trump than France or Germany in 2025. The results showed that this would be successful. However, most economists expected President Trump’s policies to have some negative impact on the UK.
Economists say UK growth will still lag behind the US as the temporary stimulus from increased government spending included in the Budget wears off and rising labor costs hit employers. said.
Many economists said wages would continue to rise in real terms and people would be somewhat better off. But people will not see much improvement, he added, as prices and borrowing costs remain high and rising tax burdens are fueling fears about job security.
Faheen Khan, senior economist at manufacturing trade group Make UK, said an increase in national insurance contributions for employers would be a “heavy pill to swallow” for an industry whose costs have been rising for years.
Stubborn inflation will also limit the Bank of England’s room to cut interest rates, and the UK will continue to suffer from chronically weak investment and productivity, the study said.
A separate survey of 500 British business leaders, conducted just before Christmas by polling firm JL Partners for WPI Strategy, found that the government should reduce the overall tax burden on businesses to make the UK more attractive for investment. He said there was a need to lower the rate of change and make regulators more growth-oriented.
However, 50% of respondents think the UK will be a more attractive investment destination in 2025 than in 2024, compared to 37% who think this is not the case. Those surveyed cited political stability as the most important factor when considering where to invest.
The FT’s investigation concluded ahead of a series of data releases showing the scale of the challenge Reeves faces this year.
Growth reversed at the end of 2024, with GDP stalling through the third quarter and contracting in October. At the same time, price pressures have persisted and business confidence has worsened.
Most economists believe a return to growth will be facilitated by front-loading increases in government spending and by encouraging consumers to spend their accumulated savings more aggressively.
But forecasts compiled by Consensus Economics in December, before the latest figures were released, showed that economists on average expected GDP growth in 2025 to be just 1.3%. Most respondents to the FT survey had similar expectations.
Andrew Goodwin, UK chief economist at consultancy Oxford Economics, said the OBR was “too bullish about the public sector’s chances of driving growth” in meeting its forecast of 2% GDP growth in 2025. said.
Diane Coyle, a professor of public policy at the University of Cambridge, said getting the economy back to its pre-2008 financial crisis growth rate “will require far more investment than she has in public services and infrastructure.” he added. [Reeves] We have budgeted for. ”
Other respondents called Labour’s current plans, which suggest that growth in public service spending will slow sharply from 2026, “unlikely,” “unrealistically tough” and “politically untrustworthy.” .
Paul Dales, from consultancy Capital Economics, argued that it would be difficult to bridge the gap with additional public borrowing and said the UK was “approaching the limits” of what financial markets could tolerate.
Given the political costs of such a rapid change in direction, the Chancellor may choose to wait until later in parliament to raise taxes.
Ray Burrell, emeritus professor at Brunel University, said changes in 2025 were likely to be “subtle”, such as reforms to property tax and tobacco and alcohol tax.
Ricardo Reis, a professor of economics at the LSE, said funding had been set aside for investment projects that had not yet been announced and “could be canceled or postponed at any time in the event of a crisis.”
But some respondents said Reeves could choose to make unpopular changes sooner or later.
“Most prime ministers get over the pain early in parliament,” said Jonathan Haskell, a professor at London’s Imperial College and a former member of the Bank of England’s monetary policy committee.
Low growth is not the only reason why government spending plans will be under pressure in 2025.
Most survey respondents expect inflation to remain above the BoE’s target for the rest of the year, so the central bank will only take “small steps” to lower interest rates, meaning the cost of servicing the government will be lower than usual. respondents said they expected it to be higher than that.
Most economists did not view slightly higher inflation as a major problem for the economy. The bigger problem, said Bart van Ark, director of the Productivity Research Institute at the University of Manchester, is that “even after real wages have been revised, price levels are still perceived to be high.”
Nick Bosanquet, a former professor at Imperial College who now works for consultancy Aiming for Health Success, said “fear” about inflation meant “most households will not be able to pay”. . . . But there are many worries about the future. ”
Bronwyn Curtis, Chair of the TwentyFour Income Fund, added: [of strong wage growth] is a thing of the past and taxes workers. . . It doesn’t make them feel better. ”
Kate Barker, a former member of the BoE’s monetary policy committee, said higher taxes would ultimately lead to better public services and give households more security even if their ability to spend was reduced.
HSBC economists Simon Wells and Liz Martins said the labor market in 2025 will be the “biggest unknown”, with companies cutting jobs, automating, moving jobs overseas, and reducing or increasing wages. It pointed to plans to address the impending rise in employment costs. price.
“All of this is negative for British workers,” they added. “So the question is how does the pain spread?”
Additional reporting by Jim Pickard
