Introduction
Concerns are mounting over the trajectory of the UK economy, with leading think tanks warning that a combination of rising taxes, increased government regulation, and higher public spending could restrict economic growth.
Experts indicate the unemployment rate is expected to reach its highest level since 2015 this year, driven by challenging labour market conditions and higher costs for employers. Fresh economic forecasts project modest growth and rising public debt, providing a challenging backdrop for policymakers and businesses.
Slow economic growth amid higher taxes
New forecasts from the National Institute of Economic and Social Research (NIESR) predict the UK economy will grow by 1.4% this year, slowing slightly to 1.3% in 2027. While this is a marginal improvement on previous forecasts of 1.2% for both years, analysts caution that such growth rates are insufficient to address the needs of an ageing population or to improve living standards.
Commenting on the economic outlook, Lord Frost, Director General of the Institute of Economic Affairs, said that maintaining growth below 1.5% risks failing to meet rising social and fiscal demands. 'Growth rates remaining below 1.5% is barely enough to keep up with the demands of an ageing population, never mind improve living standards or the public finances which remain in a perilous state,' Lord Frost said.
Unemployment projected to reach post-2015 high
Alongside subdued growth rates, unemployment is expected to increase in the coming year. The NIESR forecasts the jobless rate will rise to 5.4% in 2026, up from 4.8% in the previous year. This would be the highest unemployment rate in the UK since 2015.
NIESR economist Ben Caswell explained, 'Part of this unemployment story in the UK is rising labour costs.' Official data also point to increased unemployment in sectors such as information technology, which may be partly attributed to the impact of artificial intelligence on entry-level roles.
Rising labour costs and youth employment
A recent increase in the national minimum wage and employers’ social security contributions has reportedly led to a 10.6% rise in the cost of hiring entry-level workers over the past year. Sectors with a higher proportion of minimum wage jobs have seen sharper increases in unemployment, according to NIESR analysis.
Caswell added, 'Industries which have a larger share of their workforce on the minimum wage have also experienced larger increases in their respective unemployment rates.' Lord Frost further highlighted that higher costs are particularly detrimental for young people, stating, 'a spike in the cost of hiring entry-level workers [means] fewer jobs and opportunities for young people.'
Minimum wage and labour market trends
The national minimum wage in the UK is set for a further 4% increase in April, keeping it among the highest for major economies compared to median earnings. The government has indicated it plans to continue phasing out the lower minimum wage rate for younger adults aged 18 to 20.
The NIESR predicts that, unless the UK enters a recession, the unemployment rate could fall back to about 5% by 2028 or 2029, which it regards as the long-term sustainable level outside periods of exceptional economic conditions.
Outlook for public finances and policy responses
Public sector debt remains a central concern, with the debt-to-GDP ratio forecast to approach 100% by the end of the decade. The NIESR notes this high level of indebtedness limits the government’s ability to provide extra fiscal support in the event of future economic shocks.
According to Lord Frost, 'The government must get serious about growth, stop strangling the private sector, and tackle real supply-side reform to turn the economy around.' He pointed to recent increases in National Insurance and the extension of employment rights as factors contributing to higher labour costs.
Final Summary
In summary, the UK faces a complex economic environment, shaped by moderate growth, rising unemployment, and restrictive fiscal conditions. Analysts point to higher taxes, increased labour costs, and expanding regulation as significant headwinds to stronger growth, with particular concern for employment prospects among younger workers.
As the government and Bank of England consider their next steps, stability in public finances and labour market flexibility will be critical.
