Economic and taxation policy: Impact on growth, jobs and prosperity

Approximate read time: 45 minutes 

This briefing has been prepared for the following House of Lords debate scheduled for 13 November 2025: 

Lord Elliott of Mickle Fell (Conservative) to move that this House takes note of the impact of the government’s economic and taxation policies on jobs, growth and prosperity. 

This briefing includes sections looking at economic and taxation policy under Labour, statistics related to growth, jobs and prosperity, and selected commentary. 

1. Economic policy 

1.1 Overview 

Although the factors that make up a government’s economic policy are broad and varied, one of the key themes that has run throughout Labour’s statements on its economic vision is ‘kickstarting economic growth’.^[1] For example, Labour’s manifesto set out the following ambition: 

Kickstart economic growth: to secure the highest sustained growth in the G7—with good jobs and productivity growth in every part of the country making everyone, not just a few, better off.^[2] 

This was reiterated by HM Treasury at the time of the 2024 autumn budget, where it described the “growth mission” as the “central mission of the government”.^[3] It explained this would be achieved through a framework of stability (such as fiscal rules), investment, and reform (including planning reforms and a new infrastructure strategy).  

It then broke this framework down further into seven pillars. These are set out below, along with summary information and links to read more about developments in each area. More details on the government’s policies (as listed at the time of the October 2024 budget) are available on pages 62–79 of the HM Treasury report.  

The government’s focus on investment and infrastructure, while also sticking to its new fiscal rules, has continued in subsequent months. For example, in a speech in January 2025 Chancellor Rachel Reeves spoke about the need to go “further and faster” to deliver economic growth, and detailed investments being made in certain infrastructure and innovation projects.^[5] Commenting on this at the time, the Resolution Foundation characterised the government’s approach as follows: 

One can begin to discern the outlines of a growth strategy taking shape, and it is increasingly clear what this government wants to be known for: building things. […] 

The chancellor’s speech listed [planning and other] reforms […] some of which we already knew something about, alongside approaches to specific infrastructure projects for both the Ox-Cam arc and our large and sometimes underperforming Northern English conurbations. The aim is to provide infrastructure, financing and connectivity and to streamline planning and regulatory barriers, which together should enable further investments by the private sector.^[6] 

Similarly, the spring statement in March 2025 included details of increased investment in defence and construction, and adjustments to welfare and departmental spending with an eye on the government’s fiscal targets.^[7] It also set out policies intended to recoup more tax; for example, by investing in HM Revenue and Customs (HMRC) procedures for tax recovery. 

Following on from this, the June 2025 government spending review gave further detail on Labour’s ongoing plans for spending and investment. It explained: 

Spending review 2025 (SR25) sets out the government’s plans to invest in Britain’s renewal: its security, health and economy. SR25 sets departmental budgets for day-to-day spending until 2028–29, and until 2029–30 for capital investment, with total departmental budgets growing by 2.3% across the spending review (SR) period. It also sets devolved government block grants for the same period. 

[…] 

Over the last year, the government has taken action to fix the foundations of the economy, put the public finances on a sustainable path, and support growth. At the budget last autumn, the government set out a clear fiscal strategy which included fundamentally reforming the fiscal framework by changing the government’s approach to spending to support transparency, certainty and stability, and introducing new, non‑negotiable fiscal rules. The government has now confirmed its plans for spending within the totals set out at the spring statement.^[8] 

The spending review contained sections on: 

• ensuring a productive and agile state (for example, through investment in data and technology and seeking cost efficiencies in public services) 

• investment in defence and national security 

• NHS funding 

• growth and clean energy (for example, policies and investment for infrastructure, innovation, labour market skills and opportunities, and energy security and climate resilience) 

• plans for departmental spending 

Further information on the spending review can be found in the House of Commons Library briefing ‘Spending review 2025: A summary’ (12 June 2025) and Institute for Fiscal Studies, ‘Spending review 2025’ (11 June 2025). 

1.2 Fiscal rules 

In its 2024 general election manifesto, Labour stressed the importance of “non-negotiable” fiscal rules applying to every decision it would make if in office.^[9] It has described these as important to support economic and fiscal stability and ensure accountability and transparency.^[10] 

Governments have been required to set fiscal rules since the Budget Responsibility and National Audit Act 2011.^[11] The rules are set out through a charter of responsibility. 

The Labour government published a revised draft charter of responsibility containing its fiscal rules alongside the 2024 autumn budget. They were approved in the House of Commons on 29 January 2025.^[12]  

The rules state: 

• The current budget must be in surplus in 2029–30, until 2029–30 becomes the third year of the forecast period. From that point, the current budget must then remain in balance or in surplus from the third year of the rolling forecast period, where balance is defined as a range: in surplus, or in deficit of no more than 0.5% of gross domestic product (GDP). 

• This range will support the government’s commitment to a single fiscal event every year by avoiding the need for policy adjustment at forecasts outside of fiscal events. If the range is used between fiscal events, the current budget must return to surplus from the third year at the following fiscal event. 

The Treasury’s mandate for fiscal policy is supplemented by:  

• A target to ensure debt, defined as public sector net financial liabilities (PSNFL), is falling as a share of the economy by 2029–30, until 2029–30 becomes the third year of the forecast period. Debt should then fall by the third year of the rolling forecast period.  

To ensure that expenditure on welfare remains sustainable, the Treasury’s mandate for fiscal policy is further supplemented by:  

• A target to ensure that expenditure on welfare is contained within a predetermined cap and margin set by the Treasury.^[13] 

However, the charter also states that the rules could be suspended in the case of an emergency or significant negative economic shock.  

The Institute for Government has published an explainer on the current fiscal rules: ‘Current UK fiscal rules’ (19 November 2024). Other background detail (such as previous governments’ fiscal rules) can be found in the House of Commons Library briefing ‘The UK’s fiscal targets’ (2 May 2025). 

The Office for Budget Responsibility (OBR) produces estimates of the likelihood of meeting the fiscal rules under the government’s current policies. This ‘likelihood’ is based on whether the OBR judges the government has a greater than 50 percent chance of meeting each target.^[14] 

The OBR’s latest estimate, published in March 2025, projected targets were on course to be met, but by “small margins”. It projected: 

• The fiscal mandate, for the current budget to be in surplus, is met by a margin of 0.3 percent of GDP (£9.9bn) in 2029–30. The probability of the target being met is assessed as 54 percent.  

• The supplementary target, for public sector net financial liabilities to be falling as a percentage of GDP, is met by a margin of 0.4 per cent of GDP (£15.1bn) in 2029–30. The probability of the target being met is assessed as 51 percent based on historic forecast errors.  

• The welfare cap plus margin set for 2029–30 is on course to be met by £13.5bn.^[15] 

However, the OBR said there is “significant risk” around the current budget forecast; it explained: 

Headroom of £9.9bn against the fiscal mandate is only one-third of the average of £31.3bn that chancellors have set aside against their fiscal rules since 2010. It is also a very small margin compared to the risks and uncertainty inherent in any fiscal forecast. The average absolute final-year revision to pre-measures borrowing over the past ten forecasts has been £19.4 bn. And risks to the forecast are heightened at present given the significant uncertainty surrounding domestic and global economic developments.^[16] 

Further information on the uncertainties and projections can be found in chapter 7 of the OBR’s report. 

In addition, the OBR estimates were based on the government’s initial plans to reduce welfare spending.^[17] However, in June 2025, the government scaled back these plans following criticism from Labour backbench MPs.^[18] Therefore, welfare spending is likely to be higher than the OBR’s predictions.^[19] Indeed, in an interview in July 2025, Rachel Reeves suggested the government would need to find a way in the autumn budget 2025 to cover the increased costs the changes to the government’s welfare policy had caused, and did not rule out tax rises.^[20] However, she did stress a continuing commitment to working within the government’s fiscal rules. 

2. Government tax policy 

As noted in the sections above, one of the aims of the government’s tax policy is to ensure its fiscal targets are met whilst also pursuing its broader policies. Rachel Reeves reaffirmed this in a speech on 4 November 2025 foreshadowing the autumn budget, stating the government would “[make] the tax and spending decisions to get debt down and to fund our public services sustainably”.^[21] 

However, in addition to the above, Labour set some additional guiding principles for its tax policy while in office in its 2024 general election manifesto. Labour referred to protecting “working people” from tax increases and also addressing “unfairness” in the tax system: 

We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT. 

[…] 

Labour will address unfairness in the tax system. We will abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period. We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here. Private equity is the only industry where performance related pay is treated as capital gains. Labour will close this loophole. We will modernise HMRC and change the law to tackle tax avoidance. We will increase registration and reporting requirements, strengthen HMRC’s powers, invest in new technology and build capacity within HMRC. This, combined with a renewed focus on tax avoidance by large businesses and the wealthy, will begin to close the tax gap and ensure everyone pays their fair share.^[22] 

2.1 Tax announcements in autumn budget 2024 

Rachel Reeves reaffirmed Labour’s position on tax set out in the manifesto at the 2024 autumn budget, although she did state she had to make some “difficult decisions” on taxation.^[23] She put this down to public finances being in a worse position than the government anticipated, saying it had also inherited a “£22bn black hole” in planned spending.^[24] She said that the budget sought to raise taxes by around £40bn, and argued this was required to properly fund public services and ensure public finances were stable. However, she stressed: 

I have made an important choice today: to keep every single commitment that we made on tax in our manifesto. I say to working people, I will not increase your national insurance, I will not increase your VAT, and I will not increase your income tax. Working people will not see higher taxes in their payslips as a result of the choices I am making today. That is a promise made and a promise fulfilled.^[25] 

As set out in the House of Lords Library’s briefing on the 2024 autumn budget, the most significant tax decisions announced by the chancellor, in terms of fiscal impact, were as follows:^[26] 

National insurance contributions (NICs). From 6 April 2025: 

• The rate of employers’ NICs will rise by 1.2 percentage points to 15%. 

• The level at which employers start paying NICs for each employee will fall from £9,100 to £5,000. 

Capital gains tax: 

• For disposals made on or after 30 October 2024, the lower rate of capital gains tax will rise from 10% to 18%, and the higher rate from 20% to 24%. 

• From 6 April 2025, the rates of capital gains tax that apply to carried interest (the share of the profits which arise to managers of an investment fund where the investments in a fund perform above a certain level) will rise from 10% and 28% to 32% and then to 36% in April 2026. 

• Capital gains tax rates for business asset disposal relief and investors’ relief will rise to 14% from 6 April 2025 and match the main lower rate of 18% from 6 April 2026.  

Inheritance tax: 

• The previous freeze in inheritance tax thresholds until 2028 will be extended for a further two years until 2030. 

• From April 2026, inheritance tax relief for business and for agricultural assets will be capped at £1mn, with a new reduced rate of 20% being charged on assets above that. 

• From April 2026, inheritance tax chargeable on most shares listed on the alternative investment market (AIM) will be set at a rate of 20%, up from zero previously. 

• From April 2027, inheritance tax will apply to pension wealth that is transferable at death (unused pension funds and death benefits). 

Stamp duty: 

• From 31 October 2024, the extra rate of stamp duty charged on additional homes will rise from 3% to 5%. 

Changes to the regime for non-domiciled taxpayers: 

• From April 2026, the current non-domicile tax regime will be replaced with a new residence-based system. 

VAT: 

• From 1 January 2025, VAT will be charged on private school fees and business rates charitable relief will be removed from private schools in England. 

The changes to NICs were by far the largest of these measures, raising a forecasted £25.7bn per year by 2029/30. 

Revenue-raising measures were partly offset by several tax reductions. These included: 

• From 6 April 2025, the employment allowance for NICs will rise from £5,000 to £10,500 a year and the £100,000 threshold will be removed. 

• Fuel duty will remain frozen and the temporary 5p cut in fuel duty announced by the previous government will be extended for one year to 2025/26. 

• The current cash freeze in key income tax thresholds will end in 2028/29, at which point thresholds will rise in line with inflation. 

The tax increases were forecast to raise an additional £36.2bn, or just over 1% of GDP, a year on average in additional revenue. According to the Institute for Fiscal Studies (IFS), as a share of GDP, the rise in taxation by the end of this decade would be the second largest of any post-war fiscal event.^[27] The tax take is forecast to increase to a peacetime record high of 38.2% of GDP by 2029/30.^[28] 

The tax plans set out in the budget were criticised by then opposition leader Rishi Sunak, arguing that Labour had ‘broken [its] promise’ not to increase taxes affecting working people.^[29] He argued a number of taxes that were increasing would affect working people, and particularly referenced the employer national insurance increases: 

As the independent IFS has said, this is a straightforward breach of Labour’s manifesto, because, as the OBR has made clear, this tax rise is “passed through entirely” to working people. Even since the chancellor started speaking, the IFS has already confirmed that the vast majority of this tax increase will hit working people through lower pay.^[30]  

He claimed the public finances were not as bad as Labour was stating, and that the policies announced in the budget resulted from the new government’s handling of the public finances and represented a Labour agenda of “higher taxes” and “higher borrowing”.^[31] 

Liberal Democrat leader Ed Davey welcomed the government’s focus on its new fiscal rules, public services and capital investment.^[32] He also agreed with certain other measures (such as raising the national living wage) and the need to push for economic growth. However, he criticised the “tax hikes” on small and medium-sized businesses, the changes to winter fuel payments, inheritance tax changes and increases in employer NICs. Because of this, he said that the budget would do little to help those struggling with the cost of living.  

Concerns have continued to be raised about the impact of many of the tax increases announced in the budget, particularly the employer NIC increases. For example, UK firms have reported lower business confidence and plans to cut jobs or recruit fewer people as a result of the measure.^[33] Some commentators have argued these changes will weaken the labour market and sectors of the economy.^[34] In addition, there have been protests about the inheritance tax changes affecting farmers.^[35] 

Further analysis of the budget and the response to it can be found in the following briefings: 

• House of Commons Library, ‘Autumn budget 2024: A summary’, 31 October 2024; and ‘Autumn budget 2024: Reaction’, 1 November 2024 

• House of Lords Library, ‘Autumn budget 2024: Key announcements and analysis’, 5 November 2024 

• Institute for Fiscal Studies, ‘Autumn budget 2024’, 24 October 2024 

In addition, assessment of and further reaction to the employer NIC changes can be found in: 

• House of Lords Library, ‘National Insurance Contributions (Secondary Class 1 Contributions) Bill’, 23 December 2024 

• House of Commons Library, ‘National Insurance Contributions (Secondary Class 1 Contributions) Bill 2024–25: Progress of the Bill (Lords stages)’, 13 March 2025 

2.2 Recovering more tax 

As set out above, the government also committed to make changes to “address unfairness in the tax system” by changing the way certain groups are taxed and closing the ‘tax gap’ (defined as the difference between the amount of tax that should, in theory, be paid to HMRC and what is actually paid). 

The 2024 budget set out the following measures impacting non-domiciled individuals that would take effect from 6 April 2025: 

Changes to the taxation of non-UK domiciled individuals—The government will legislate to abolish the remittance basis of taxation for non-UK domiciled individuals and replace it with a simpler and internationally competitive residence-based regime, which will take effect from 6 April 2025. Individuals who opt-in to the regime will not pay UK tax on foreign income and gains (FIG) for the first four years of tax residence. From 6 April 2025 the government will introduce a new residence-based system for inheritance tax (IHT), ending the use of offshore trusts to shelter assets from IHT, and scrap the planned 50% reduction in foreign income subject to tax in the first year of the new regime.^[36] 

HM Treasury estimated these changes may raise an average of £3.2bn a year from 2026/27 to 2029/2030.^[37] However, the OBR and others have stressed that it could increase migration rates among those previously classed as non-domiciled taxpayers.  

Assessing this prospect in August 2025, the Financial Times reported that the migration of these individuals had been lower than anticipated.^[38] However, it also published an article in October 2025 suggesting that, even so, the new regime has reduced the UK’s competitiveness and attractiveness for wealthy individuals:  

When wealthy individuals can choose between multiple jurisdictions offering more favourable tax regimes, the UK’s proposition has become significantly less attractive.^[39] 

Regarding closing the tax gap, the government published a ‘transformation roadmap’ for HMRC in July 2025 which included a section on how it was seeking to achieve this. It listed four areas HMRC and wider government were working together on:^[40] 

• process and policy changes (including digitalisation, automation, and AI) 

• increasing and strengthening HMRC’s compliance and debt interventions (for example, recruiting and training 5,500 more compliance staff) 

• tackling fraud and economic crime (such as expanding HMRC’s counter-fraud capabilities) 

• raising the standards of advisers and intermediaries in the tax and customs system (for example, by strengthening the registration requirements for tax advisers) 

HMRC’s tax gap statistics for the 2023/2024 tax year estimated the gap at 5.3% of total theoretical tax liabilities, or £46.8bn in absolute terms.^[41] The gap was similar the previous year, standing at 5.6% of total theoretical liabilities and £46.4bn. HMRC reported the tax gap has steadily reduced since 20 years ago, before remaining relatively consistent in recent years: 

[…] there has been a long-term reduction in the tax gap as a proportion of total theoretical tax liabilities: the tax gap reduced from 7.4% in the tax year 2005 to 2006 to 5.1% in the tax year 2017 to 2018—whilst there has been some fluctuation in subsequent years, the tax gap has been broadly stable at around 5.5%, and was 5.3% in 2023 to 2024.^[42] 

Further information, including breakdowns by taxes, can be found on the HMRC webpage ‘Measuring tax gaps 2025 edition: Tax gap estimates for 2023 to 2024’ (19 June 2025). 

2.3 Statements on tax policy since the autumn 2024 budget 

Following the 2024 autumn budget, Rachel Reeves defended the tax decisions she had made, repeating that they were necessary in light of the UK’s economic position. However, speaking at a Confederation of British Industry (CBI) conference in November 2024, she also said that she was ruling out further borrowing and tax increases: 

I faced a problem, and I faced into it… we’ve put our public finances back on a firm footing, and we’ve now set the budgets for public services for the duration of this parliament. 

Public services now need to live within their means because I’m really clear, I’m not coming back with more borrowing or more taxes.^[43] 

There are signs this position has changed over the course of 2025. For example, when questioned on this pledge in September 2025, she said the world has changed, highlighting a number of factors: 

Whether it is wars in Europe and the Middle East, whether it is increased barriers to trade because of tariffs coming from the United States, whether it is the global cost of borrowing, we’re not immune to any of those things.^[44] 

In addition, as mentioned earlier in this briefing, Rachel Reeves also previously referred to the extra welfare costs the government will have to cover following its changes to planned policy in this area.^[45]  

Most recently, on 4 November 2025, Rachel Reeves gave a ‘scene setter’ speech ahead of the 2025 autumn budget, which is scheduled for 26 November 2025. She said “the world has thrown even more challenges our way” since the last budget, and listed a number of issues affecting the UK economy and the government’s approach to it:^[46] 

• global challenges, including supply chain issues, tariffs and high government borrowing costs 

• persistent inflation, which she linked to the global supply chain issues, continuing to impact cost of living  

• weaker than expected productivity 

• high national debt 

Although she argued that the government had made progress in addressing these issues, highlighting its commitment to its new fiscal rules and to improving infrastructure and investment, she intimated that more needed to be done: 

As I take my decisions on both tax and spend, I will do what is necessary to protect families from high inflation and interest rates to protect our public services from a return to austerity and to ensure that the economy that we hand down to future generations is secure, with debt under control. 

If we are to build the future of Britain together, we will all have to contribute to that effort, each of us must do our bit for the security of our country and the brightness of its future. 

There is a reward for getting these decisions right. To build more resilient public finances—with the headroom to withstand global turbulence, giving business the confidence to invest and leaving government freer to act when the situation calls for it, to continue to invest in our infrastructure and our industry to build a stronger economy, and to get the cost of borrowing down—spending less on debt interest, and more on schools and our health service.^[47] 

This, and other government comments, has increased speculation that the government will be raising taxes in the 2025 autumn budget, and may even be considering tax rises ruled out in its manifesto: on income tax, VAT or (employee) national insurance.^[48] 

Responding to the ‘scene setter’ speech, Daisy Cooper, Treasury spokesperson for the Liberal Democrats, reportedly said: “It’s clear that this budget will be a bitter pill to swallow as the government seems to have run out of excuses”.^[49] Conservative Party leader Kemi Badenoch has said that the chancellor should be sacked if she raises taxes at the budget, highlighting the previous pledges the government has made.^[50] 

3. Statistics and indicators 

3.1 Employment figures 

The following charts, taken from the Office for National Statistics (ONS) labour market statistics, show quarterly employment figures (for those aged 16 to 64) from 2015 to quarter 2 (Q2) of 2025.^[51] They show relatively stable rates across the period, with employment averaging 75% and unemployment averaging 4%.

Figure 1. Proportion of the UK population (aged 16 to 64) who are in employment, seasonally adjusted 

Figure 2. Proportion of the economically active population, aged 16 and over, who are unemployed (seasonally adjusted)

Figure 3. Proportion of UK population, aged 16–64, who are economically inactive (seasonally adjusted) 

The latest ONS release (published 11 November 2025) provided the following updated summary of labour market data:

• The UK employment rate for people aged 16 to 64 years was estimated at 75.0% in July to September 2025. This is down in the latest quarter but above estimates of a year ago.
• The UK unemployment rate for people aged 16 years and over was estimated at 5.0% in July to September 2025. This is up in the latest quarter and above estimates of a year ago.
• The UK economic inactivity rate for people aged 16 to 64 years was estimated at 21.0% in July to September 2025. This is largely unchanged in the latest quarter but below estimates of a year ago.^[52]

As noted in several media reports, the unemployment rate reported was the highest since the period December 2020 to February 2021.^[53]

3.2 Economic growth 

The following graphs show quarterly UK GDP growth, and compare it to recent figures for the G7 (in the context of Labour’s target of achieving the highest GDP growth in the G7). The figures are taken from data published by the Organisation for Economic Cooperation and Development (OECD) to allow consistent comparisons. However, the ONS data can be found here: ‘GDP quarterly national accounts, UK: April to June 2025’, 30 September 2025. 

The figures show weak GDP growth across this period, with two quarters of negative GDP growth in 2023. Otherwise, it has fluctuated between 0% and 1%. However, recent figures also show the UK performed relatively well against other G7 countries in recent quarters, with the UK top for GDP per capita growth in Q1 of 2025 and in the middle of the pack for overall real GDP growth in Q2.^[54] 

Figure 4. UK quarterly GDP growth, Q1 2022 to Q2 2025 

Figure 5. GDP per capita growth in G7 countries, January to March 2025 (Q1) 

Figure 6. Real GDP quarterly growth in G7 countries, April to June (Q2) 2025

3.3 Productivity and inflation 

The chart below, using ONS data, shows that productivity (measured by output per hour worked on a quarterly basis) has fallen since 2022. Although it has risen again since its recent low of Q3 2024, it is still below the rate for 2022.  

Figure 7. UK productivity, output per hour worked, (quarterly) 2015 to Q1 2025 

Further information on productivity can be found in the House of Commons Library briefing ‘Productivity’ (14 August 2025).  

The next chart shows inflation using the CPIH measure; this includes certain housing costs alongside the traditional CPI (consumer price index) measure, and is the ONS’s recommended measure. It shows that CPIH inflation fell from its high of 9.6% in October 2022 to a recent low of 2.6% in September 2024. However, it has been growing on average since then, and stood at 4.1% in September 2025. 

Figure 8. CPIH annual rate, January 2015 to September 2025 (monthly figures)

For reference, the CPI inflation rate (the measure the Bank of England monitors) was 3.8% in September 2025.^[55] The last time this rate was 2% or below (the Bank of England target rate) was September 2024, when it dipped to 1.7%. 

Further information on inflation can be found in: Office for National Statistics, ‘Consumer price inflation, UK: September 2025’ (22 October 2025). 

3.4 Cost of living findings 

The Joseph Rowntree Foundation has published a briefing looking at cost of living in 2025 for lower income households: ‘A year of Labour but no progress: JRF’s cost of living tracker, summer 2025’ (11 July 2025). It was based on survey data from 4,044 households with incomes in the bottom 40% in the UK. 

Among its findings, it reported: 

• In the six months to May 2025, an estimated 7.1 million (60%) low-income households were going without essentials. It said that this number had been at least 7 million since October 2022, despite certain economic conditions easing. 

• Food was still the most common essential item being missed out on by low-income families. It found 5.3 million low-income families were cutting back or skipping meals, and 4.1 million reported going hungry in the preceding 30 days. It said these numbers showed no progress on levels of hunger since October 2022. 

• 4.4 million low-income families were behind on at least one bill or credit commitment in May 2025 (37%), similar to May and October 2024. It found an average level of arrears of £1,380 (the same as May 2024); although this was down from the peak of £1,630 in October 2022. 

• Annual disposable income was around £1,000 less for these households in 2025 than in 2022. 

3.5 Other indicators and forecasts 

More general briefings on the UK economy, including recent forecasts, can be found in the following: 

• House of Commons Library, ‘Economic indicators: Key statistics for the UK economy’, 27 October 2025 

• Office for Budget Responsibility, ‘Commentary on the public sector finances: September 2025’, 21 October 2025; and ‘Economic and fiscal outlook’, 26 March 2025 

• Bank of England, ‘Monetary policy report: November 2025’, 5 November 2025 

For example, the Bank of England report published on 5 November 2025 included the following insights:^[56] 

• Inflation may have peaked. It predicted CPI inflation to reduce to around 3.2% by March 2026. It put a lot of this decline in inflation down to reducing services prices inflation. 

• Underlying GDP growth remains subdued but is expected to pick up slightly in the near term. It said that uncertainty about the measures in the 2025 autumn budget may be factoring into general economic performance.  

• Household consumption growth has been weak, with a limited recovery expected in the near term. It hoped that expected falls in interest rates would help drive consumption growth in the coming quarters. 

• Business confidence and investment intentions remained subdued. It said that business investment fell by 1.1% on the quarter in 2025 Q2, but was 3% higher than a year ago. However, it said this data was often volatile. It highlighted weak demand and uncertainty around the budget as potential factors. 

• Underlying employment growth remains close to zero. It highlighted increases in employer NICs and the national living wage as issues impacting this, along with generally weak demand. It predicted the unemployment rate to continue to rise gradually, reaching 5% in 2025 Q4. Further details of the Bank’s assessment of the labour market can be found in box E of the report. 

4. Commentary and further material 

4.1 Institute for Fiscal Studies: Green budget 2025 

The IFS published its latest ‘Green budget’ in October 2025, providing commentary and analysis on UK economic policy and tax options ahead of the 2025 autumn budget.^[57] The report has been supported by Barclays (which authored some chapters), the Nuffield Foundation and the Economic and Social Research Council. 

The summary paper’s section on the overall economic outlook (chapter 1, authored by Barclays) highlighted issues with the economy requiring “fiscal consolidation” at the budget. It stated: 

The UK economy stands at a pivotal juncture. Growth is decelerating and expected to slow further in the second half of the year, and unemployment has been on an upward trend since mid 2022. Meanwhile, inflation remains considerably above the Bank of England’s 2% target, making the Monetary Policy Committee cautious about cutting rates for fear of de-anchoring expectations and embedding structurally higher inflation. A substantial fiscal consolidation will very likely be needed at this autumn’s budget if the chancellor is to continue to meet her fiscal rules. 

[…] 

The economy’s medium-term prospects hinge on the successful transition from growth driven by the public sector and net trade to a more dynamic private sector, alongside improvements in productivity. Indeed, productivity growth and household saving behaviour will be decisive in shaping the trajectory of real incomes, investment and consumption over the latter half of this parliament. On these, our assessment is for improvement from the status quo of the last decade, but still short of the Office for Budget Responsibility’s forecasts from March. The risks associated with global trade uncertainty, productivity and demographic shifts remain significant, but so too do the opportunities for resilience and renewal if the right policy choices are made.^[58] 

The full report included a range of estimates and forecasts, including on household income and business investment. For example, on these it stated: 

Real income growth to drive medium-term consumption

After a period of catch-up in 2024, real disposable incomes fell by 0.7% in the first quarter of 2025 and only partially recovered in Q2. Increased inflation alongside moderating nominal wage growth and a higher tax transfer is likely to weigh on real income growth this year. After that point, income growth should pick up as a combination of falling inflation and improvements in productivity allows for real wage growth. Although soft over 2026, we expect employment growth to strengthen from 2027 onwards, further increasing labour income. Partially offsetting this is the increased taxation that we anticipate being announced at this budget, but ultimately, we expect real incomes to grow around 1.1% per year on average over the next five years (Figure 1.5). This, coupled with a gradual decline of the saving rate, leaves household consumption growing around 1.4% per year between 2027 and 2031, stable as a share of GDP.^[59]

Business and investment

Business surveys suggest that business investment will be muted for the rest of 2025 and early 2026. This is consistent with signs that firms’ margins have been squeezed as they have absorbed increasing unit labour costs driven by low growth in worker productivity and rising non-wage costs following the sizeable increase in employer national insurance contributions (NICs) in April 2025. The profit share of GDP for corporations has fallen by 0.9 percentage points between Q3 2024 and Q2 2025 and now sits at 21.3%, the lowest since Q1 2007. The net rate of return for non-financial corporations is also low, disincentivising investment. It stood at 8.8% in Q2 2024, maintaining a long-term downward trend since 2015. […]

However, as the effect of easing interest rates passes through and uncertainty diminishes, we expect firms to increase investment more rapidly from 2026 onward, averaging 1.6% over the period to 2030, and rebalancing the labour-to-capital ratio in favour of capital in response to the relative shift in factor costs. This is not remotely sufficient to fully close the capital gap the UK has with advanced economy peers […] but should be sufficient to increase total factor productivity growth from current rates.^[60]

As a result of its analysis on the broader economic picture, the author of the section, Jack Meaning, stressed that the chancellor should “tread carefully” in the 2025 autumn budget, balancing fiscal discipline with the risks of limiting economic recovery or impacting living standards. He particularly warned against policy levers that could lead to “near-term inflation”, for example, VAT increases.^[61] The piece reasoned: 

[That would raise] inflation at a point when inflation is already high enough—and central bank credibility under enough scrutiny—that monetary policymakers are not comfortable looking through the temporary price-level shock for fear of second-round inflationary effects. In this scenario, we find that the negative effect on GDP would be twice as big at its peak as if the same consolidation was done through non-inflationary taxation, and interest rates would remain higher for longer, requiring a more aggressive easing cycle in 2027.^[62]

Therefore, the author instead recommended extending the freeze on income tax thresholds beyond 2027–28 and minor increases in the basic and higher income tax rates (for example, 1 percentage point on each). He said: 

While this would contravene a government manifesto pledge, we judge this to be one of the few ways to raise sufficient funds credibly and reliably, and a plausible scenario […] Such a consolidation would weigh on economic activity, reducing the level of GDP by 0.25% at peak impact, which occurs in 2028. This implies that the impulse to growth is positive (although from a lower base) in 2029 and 2030.^[63] 

He concluded “there are risks on both sides” and agreed the policy choices were “narrow”, but believed this would be a “navigable” approach.^[64] 

The paper also included a chapter (chapter 4) analysing the possible options for tax increases. In summary, some of the key points in this section stated:^[65] 

• Tax revenue as a share of national income is set to reach a UK record high of 37.4% in 2026–27. However, it noted this was still lower than many other Western European countries. It therefore argued increasing taxes was a feasible option. 

• Restricting income tax relief on pension contributions could raise large sums but should be avoided. It said it would be unfair, distortionary and may be complex in practice. 

• Raising the rates of income tax, NICs or VAT—the three largest taxes—could straightforwardly raise large sums, although it noted the political issues with doing so. However, it said that raising enough revenue from the next four largest taxes—corporation tax, council tax, business rates and fuel duties—would also bring challenges. 

• It cautioned against introducing a wealth tax, which it said could be practically difficult and may influence high-worth individuals leaving the UK (or not coming to the UK). 

• It also cautioned against raising stamp duty, arguing this leads to asset misallocation and lower labour mobility, therefore dragging on economic growth. 

Overall, the IFS stated: 

It would be difficult, but not impossible, for the chancellor to raise tens of billions of pounds more revenue without breaking Labour’s manifesto promise not to increase national insurance, the basic, higher or additional rates of income tax, or VAT. Just because large sums could be raised elsewhere does not mean it would be sensible. Many of the tax-raising options outside the ‘big three’ would have particularly damaging effects on growth and welfare.^[66] 

In addition, it urged the chancellor to pursue a fairer, simpler and “more growth-friendly” tax system.^[67] It called for general tax reforms, highlighting property and capital taxes as good starting points. 

Further details on the IFS’s analysis can be found in the full ‘Green budget’ report. 

4.2 British Academy: Economic strategy programme 

The British Academy has been running a project involving academics and economic policymakers looking at economic growth and prosperity. The project focused on four policy areas: international trade and geopolitics; R&D and innovation; skills; and sustainability and social value. 

The project listed the following insights and recommendations for the government: 

• Investing in the UK’s capacity for investment will help the UK’s national resilience, as well as our ability to withstand and respond to the current heightened levels of global uncertainty. 

• Developing a new ‘special relationship’ between the UK and Europe based on values, geography and security to mitigate the impact of global shocks, and to deliver mutually beneficial improvements in economic exchange. 

• Exploring new collaborations with countries and regions that have an interest in remaining open and unaligned in an economic environment dominated by US-China competition. 

• Encouraging a focus on diffusion and adoption of technological and research insights alongside investment in fundamental R&D to spur innovation.  

• Promoting a more active approach to industrial policy through aligned investments in applied research, procurement, and local and regional policymaking capabilities.  

• Ensuring policymakers consider the skills needs and match of both employers and individuals so policy is adaptable to change as well as flexible to local needs. 

• Identifying and addressing the future challenges to forms and patterns of work posed by the emergence of generative AI and the need to transition to net zero. 

• Considering aspects of people’s lives beyond paid work that are fundamental to citizens’ well-being and a prosperous, well-functioning society. 

• Incorporating the social investment aspects of the economy into an analysis that is based on whole-systems approaches within government, rather than seeing these aspects as compartmentalised or disconnected.^[68] 

The project’s reports give further details.^[69] However, as part of its summary, the British Academy stressed that investment did not just mean investment in monetary terms: 

Fundamentally, policies that underpin a sustainable and long-term economic strategy should involve ‘investing in investing’ ie investing in the institutional, human and physical capital that makes a place ‘investible’ for the private sector. Here, investment does not just mean money, but also time, effort, expertise and capabilities allocated towards promoting growth, stability and societal well-being.^[70] 

Summarising the project’s general findings, British Academy Chief Executive Hetan Shah said:  

After more than a decade of low productivity growth, and now in the context of a geopolitically uncertain world, the UK needs to rethink its economic strategy. The expert insights from this work shows the UK should invest in areas of comparative advantage and deep strength—from R&D and our skills base to our positioning as an ‘honest broker’ internationally. Although the UK has strong legal, financial, cultural and scientific institutions, the infrastructure to support some of the UK’s greatest strengths is not always well aligned with our needs and opportunities. The reports show how we can make the most of our capabilities to improve our economic prosperity and resilience in an uncertain world.^[71] 

4.3 Institute for Government: Comment on 2025 budget and beyond 

In a September 2025 article, the Institute for Government (IfG) described Rachel Reeves as being in a “triple-bind”. It continued: 

Reports that the OBR is likely to downgrade its growth forecast mean she will need to raise additional revenue to stay within her fiscal rules. With departmental spending settled in June’s spending review, and the chancellor’s attempts at welfare reform to plug the gap faltering, this almost certainly means further tax increases.^[72] 

It put much of this down to economic growth remaining weak and the high levels of government borrowing. The article also referenced the government’s failure to recognise or acknowledge the “true severity of the fiscal inheritance” and the need to make more difficult choices at the 2024 autumn budget. For example, it noted the limited fiscal headroom with which the government provided itself. 

Looking ahead, the article stated that, at the very least, the upcoming budget would need to address financial gaps caused by weak economic growth and certain policy changes (for example, the scaling back of policies on welfare payments and winter fuel payments). The IfG explained this would not just be important for the government’s ‘self-imposed’ fiscal rules: 

There is a real constraint on how much any government can sustainably borrow and the signs are that this one faces a much tougher financing environment compared even to just a few years ago. Borrowing remains high—at 5% of GDP for the past few years, although falling by 1% of GDP this year—which means changes in the cost of borrowing have a big impact on the public finances.  

As the OBR concluded in its recent ‘Fiscal risks and sustainability’ report, “the UK faces a relatively high marginal cost of issuing and refinancing its gilts, both compared to the past and compared to other countries”.^[73] It is these realities that constrain how much the government can borrow in the short and longer term, not just the official fiscal rules.^[74] 

Turning to potential approaches to tax increases, the IfG cautioned against pursuing ‘stealth tax changes’ (such as income tax thresholds) or increases to lesser-known taxes. It argued that “this might be the path of least resistance in the short term—but it would be a mistake to rely solely on this, as it has been for previous chancellors”. It reasoned that this can create an inefficient tax system, create uncertainty and negatively impact investment and growth: 

Piecemeal changes based on political convenience have led to the UK’s inefficient tax system: further such changes will complicate it and increase distortions still further. Differences in the tax treatment of otherwise similar activities (such as self-employed and employee income, different consumer purchases and different types of carbon emission), among other imperfections, all create a system that distorts decisions more than is necessary. Reeves has said that growth is her main priority as chancellor: an eclectic grab bag of tax raisers that complicate an already inefficient tax system would hamper, not promote, these efforts. 

Such an approach would also make it impossible for the chancellor to articulate (and implement) a coherent strategy, particularly given the seemingly accepted problems with Treasury comms. Reeves’s corporate tax roadmap was intended to provide certainty for that part of the tax system, and did so mainly by ruling out changes to specific rates and reliefs. But large uncertainty remains for the rest of the tax system. And that uncertainty is greater because Reeves has not articulated a bigger vision for what she wants the tax system to achieve. It appears instead that any measure that might be politically palatable could be on the table, whether or not it serves the growth mission or any other government objective. This uncertainty is itself damaging for growth, and can deter businesses from investing.^[75] 

It also cautioned against relying on taxes targeting wealthy individuals. Although it argued that there were ways to improve revenues from capital gains tax and council tax in this context, it said that attempts to raise substantial sums from the richest groups would be risky and unpredictable. It said this was because it would be “sensitive to the behaviour of a small group of people”, for example, their moving away from the UK. 

As a result, it said that tax increases would also need to fall on those with average levels of income and wealth. It also argued for tax reforms, particularly in four areas:^[76] 

• Improving the way property is taxed. It said council tax should be reformed and that changes should be made to stamp duty, as this limits labour mobility and economic growth. 

• Moving to tax all income on a similar basis irrespective of its source, so as to reduce incentives to distort behaviour to minimise tax (for example, it highlighted the lower taxes on self-employed income, partnership income and capital income). 

• Moving to a uniform rate of VAT to avoid “vastly different rates distorting decisions towards buying some goods and services over others (in a way that does not serve a clear purpose)”. 

• Reducing tax disincentives for businesses to grow and workers to earn more. For example, it argued “the UK’s high VAT threshold (by international standards) encourages businesses to stop expanding when turnover reaches that level; a much lower level would bring most businesses into the VAT regime and remove the cliff-edge”. 

The article then listed several recommendations for Rachel Reeves to pursue to achieve economic progress, including:^[77]

1. Choose sensible tax rises this autumn

It suggested that the “best candidates would be increases to the main rates of VAT, income tax and national insurance—even if that has to come at the political price of undoing one of Labour’s (rash) manifesto commitments”.

2. Articulate a clear tax strategy

It suggested chancellors avoid setting clear tax strategies because they are “worried about constraining their room for manoeuvre”. However, the IfG argued that it only needs to “articulate what the tax system is trying to achieve, and commit to making changes that move in that direction”. It said that this would provide taxpayers and industry with greater certainty. It continued:^[78] 

A strategy would also give the government the opportunity to articulate how it wants the tax system to contribute to its priorities, like growth and clean energy—a role that is currently unclear. One reason why the tax measures at the October 2024 budget went down badly was because they did not seem to be consistent with the government’s pursuit of growth and tackling economic inactivity, as increasing employers’ NICs looked like a measure targeting jobs and was particularly burdensome for entry level jobs or those trying to return to the labour market after a period out of it. There was also no discussion about the role of the tax system in the recent industrial strategy, even though some of the sectors targeted by that strategy are also significantly affected by aspects of the tax system (such as creative industries’ tax reliefs, R&D tax relief and taxes and levies on energy).

A tax strategy should also highlight areas where tax policy is sending confusing or even contradictory messages to taxpayers and leading to unnecessary complexity. […]

The final area where the government would benefit from having a clear strategy is in acknowledging and setting out how it plans to address long term fiscal gaps. The most glaring of these is the failure of successive governments to set out any plans for the potential replacement of fuel duty, which currently raises £24bn a year but is forecast to fall away rapidly during the 2030s as the transition to electric vehicles gathers pace.^[79]

3. Package tax changes, including with non-tax policies

The IfG argued that tax measures where there was a clear stated link with funding a policy (for example, raising NICs with the stated intent to increase NHS spending) were often more palatable. 

4.4 Read more 

• House of Lords Library, ‘Economic growth conditions: Discussion and debate’, 20 January 2025; ‘Budget tax measures: Context for the UK’s nations and regions’, 17 January 2025; ‘Are the government’s growth ambitions realisable?’, 17 December 2024; and ‘Impact of tax policy on employment’, 28 October 2024 

• Economic Observatory, ‘What policies could kick-start economic growth in the UK?’, 22 October 2025 

• Economist (£), ‘Britain’s jobs market has a slow puncture’, 31 August 2025; and ‘Why Labour’s growth mission remains grounded’, 25 September 2025 

• Anatole Kaletsky, ‘To boost UK productivity, ordinary workers must bear more of the tax burden’, Financial Times (£), 1 November 2025 

• Patrick Minford, ‘Growth is all about incentives’, Institute of Economic Affairs blog, 5 August 2025 

• House of Commons Treasury Committee, Evidence sessions on the ‘2025 budget’, accessed 6 November 2025 (witnesses have included former chancellor George Osborne, former business and trade secretary Vince Cable and representatives from think tanks and industry) 

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Image by jcomp on Freepik.

The briefing was updated on 11 November 2025 to include information on the latest labour market statistics.