The UK will return to growth this year but the upturn will not be strong enough to spare the Labour government from raising taxes again before the next election, according to an annual Financial Times poll of economists.
The survey of 96 leading economists found that, although the UK is likely to outperform France and Germany in 2025, previously announced increases in taxes on businesses and individuals could undermine jobs and the wider economy.
Most of the economists expected only a tepid rate of expansion this year, short of the 2 per cent rebound the Office for Budget Responsibility fiscal watchdog anticipated for 2025.
“Growth will undershoot the government and the OBR’s forecasts,” said Maxime Darmet, senior economist at Allianz Trade. “Therefore, tax receipts will probably undershoot as well.”
All but a handful of respondents said UK chancellor Rachel Reeves would end up increasing taxes again before the next general election, expected in 2029, despite her protestations that Britain would not have another big tax-raising Budget in this parliament.
Andrew Oswald, professor of economics and behavioural science at Warwick university, said there would be “a dawning realisation . . . that without income tax and VAT rises, we cannot make the damn sums work”.
Reeves, who took office warning that Labour had inherited “the worst set of circumstances since the second world war”, increased employers’ national insurance contributions by £25bn in her autumn Budget — a move set to take effect in April.
“The government has chosen to frighten 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 fare better in 2025 than France and Germany, which may be hit harder by potential US tariffs threatened by president-elect Donald Trump, the survey found. However, most economists expected some negative impact from Trump’s policies on the UK.
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The economists said UK growth would still lag behind the US as the temporary stimulus of higher government spending set out in the Budget faded and higher labour costs hit employers.
Wages will still be rising in real terms, making people somewhat better off, many economists said. However, they added that people would not feel much of an improvement because prices and borrowing costs were still high and the rising tax burden was fuelling anxiety over job security.
Fhaheen Khan, senior economist at the manufacturers’ trade group Make UK, said the increase in employers’ national insurance contributions would be “a heavy pill to swallow” for industries whose costs had been rising for years.
Stubborn inflation would also limit the scope for the Bank of England to cut interest rates and the UK would continue to suffer chronically weak investment and productivity, the survey found.
A separate survey of 500 UK business leaders, carried out by polling firm JL Partners for WPI Strategy just before Christmas, said the government needed to lower the overall tax burden on companies and make regulators more growth-orientated so Britain was more attractive for investment.
However, it found that 50 per cent of respondents thought the UK would be a more attractive place to invest in 2025 than 2024, compared with 37 per cent who said the opposite. Those surveyed cited political stability as the most important factor when considering where to invest.
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The FT’s survey closed before a series of data releases showed the scale of the challenge facing Reeves this year.
Growth went into reverse at the end of 2024, with GDP stalling over the third quarter and contracting in October. At the same time, price pressures have lingered and business sentiment has soured.
Most economists think a return to growth will be helped by a front-loaded 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 the average prediction among economists was for GDP growth of just 1.3 per cent in 2025. Most of the FT survey respondents had similar expectations.
Andrew Goodwin, chief UK economist at the consultancy Oxford Economics, said the OBR had been “much too bullish on the potential for the public sector to drive growth” in reaching its forecast of a 2 per cent GDP increase for 2025.
Diane Coyle, professor of public policy at Cambridge university, added that returning the economy to the rate of growth 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 imply that growth in public service spending will slow sharply from 2026, as “implausible,” “unrealistically tight” and “not politically credible”.
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Plugging the gap with extra public borrowing would be difficult, argued Paul Dales, at the consultancy Capital Economics, who said the UK was “close to the limits” of what the financial markets would tolerate.
The chancellor could choose to wait until later in the parliament to raise taxes, given the political cost of such a rapid U-turn.
Ray Barrell, emeritus professor at Brunel University, said any changes in 2025 were likely to be “subtle”, such as reforms to property taxation, or to tobacco and alcohol duties.
Ricardo Reis, professor of economics at the LSE, said that since money had been set aside for investment projects that had not yet been announced, “these could always be cancelled or postponed if there is a crisis”.
But some respondents said Reeves might choose to make unpopular changes sooner rather than later.
“Most chancellors get the pain over early in parliament,” noted Jonathan Haskel, 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 the government’s spending plans will come under pressure in 2025.
Most survey respondents said they also expected inflation to linger above the BoE’s target throughout the year, so the central bank would take only “baby steps” to lower interest rates — which would keep the cost of servicing government higher than previous years.
Most economists did not see slightly above 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”.
Nick Bosanquet, former Imperial College professor now at the consultancy Aiming for Health Success, said “anxiety” about inflation meant “most households will be solvent . . . but with a lot of worries for the future”.
Bronwyn Curtis, chair of TwentyFour Income Fund, added: “The main positive impact [of strong wage growth] is in the past, and taxing the working population . . . will not make them feel better off.”
Higher taxes should eventually 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 BoE’s monetary policy committee.
Simon Wells and Liz Martins, economists at HSBC, said the labour market was “the biggest unknown” for 2025, pointing to corporate plans to deal with the impending rise in employment costs by cutting headcount, automating, moving jobs offshore, squeezing wages or raising prices.
“All of these are negative for UK workers,” they added. “So the question is how the pain will spread out.”
Additional reporting by Jim Pickard
