Report: Taxes to ‘cramp UK growth for two years’ thanks to Labour

Britain faces two years of ‘modest growth’ as high taxes under Labour take their toll, a report claims. In just the latest blow to Rachel Reeves ahead of the Budget in November, KPMG said that it expects output to rise by just 1.2 per cent this year and 1.1 per cent in 2026. The figure for next year will cause particular alarm, given the Office for Budget Responsibility pencilled in 1.9 per cent in March.

A downgrade on this scale at the upcoming Budget would put further strain on the Chancellor’s plans as she struggles to plug a black hole in finances, which is estimated at anywhere between £20billion and £50billion. Yael Selfin, chief economist at KPMG UK, said: ‘While the economy showed resilience at the start of the year, the second half looks more uncertain. Elevated tax burdens, weaker global trade and cautious consumers are likely to keep growth subdued into 2026.’

She added: ‘The Government faces a tough balancing act. Mounting pressures on health and defence spending, combined with weaker growth, mean difficult fiscal choices ahead.’ The Chancellor was last week accused of creating an ‘economic doom loop’ by raising taxes rather than cutting spending, in a bid to make her Budget plans add up.

She announced £40billion of tax rises in her first Budget last October. But since then, the economy has ground to a halt, unemployment has risen to a four-year high of 4.7 per cent, and inflation has more than doubled to 3.8 per cent, which is the highest in the G7 group of developed economies.

KPMG expects inflation to stay above the 2 per cent target into late 2026, peaking at 4 per cent this autumn with high food prices hitting consumers. The report said ‘domestic services inflation remains particularly stubborn’ as Labour’s £25billion national insurance tax raid pushes up prices. It also predicts that the jobs market will ‘deteriorate further in 2025 and 2026’ with unemployment rising from its current figure to 4.9 per cent next year.

But while many observers do not expect the Bank to cut interest rates again this year, KPMG believes that one more reduction is on the cards by Christmas. That would be welcomed by borrowers hoping for cheaper mortgages as well as businesses taking on loans.

‘Despite elevated inflation, the Bank is still anticipated to lower interest rates once more in 2025, bringing the base rate to 3.75 per cent by year-end,’ said KPMG. ‘Two additional cuts are projected in 2026, taking the rate down to 3.25 per cent.’