The UK economy is facing recession risks, with yesterday’s Spring Statement confirming what many had feared: conditions are worsening, and government policy is making it harder, not easier, to grow.
Meanwhile, rising taxes, increased employment costs, and added regulatory obligations are all landing at once, threatening to choke off business investment and hiring.
Despite repeated claims of a pro-enterprise agenda, the policy direction from the government is undermining confidence and dragging the country toward a slowdown, according to some market pundits:
“The government talks a good game on growth, but it’s making life harder for the very businesses it needs to deliver it,” said Nigel Green, CEO of deVere Group. “Firms are being asked to shoulder higher taxes and rising wage costs, while contending with fresh employment rules that make operations more complex and costly. It’s a punishing environment for growth-minded businesses.”
The Office for Budget Responsibility this week confirmed that it would slash its 2025 growth forecast from 2% to around 1%. That follows cuts from both the Bank of England and the OECD. Business leaders say these revisions reflect the reality they’ve been warning about for months.
“Overall, it was a remarkably confident performance from the Chancellor as she tried to get back on the front foot, confirming pre-announced benefit cuts, pressing the case for her planning reforms and announcing measures she claims will make the UK a ‘defence industrial superpower,’” said Jason Hollands, Managing Director at wealth manager Evelyn Partners. “A key message was that the UK is on track to meet its ‘non-negotiable’ fiscal rules, words that she must hope will reassure the bond markets where gilt yields had been ticking upwards in recent days.”
Ten-year Gilt yields peaked at 4.80% during Reeves’ speech but have eased back since to 4.71% at the time of writing. The bond market seemed satisified that at least over the short term Labour still has a grip on the reality of British public finances.
Tax rises remain a major concern for UK business
There were repeated references to ‘increased global uncertainty’, a tacit reference to the disruption cause by the Trump administrations’ aggressive approach to trade, but this won’t deflect from the damage to business sentiment provoked by her tax rises announced in October. The biggest of these, a substantial rise in employers’ National Insurance costs, will come into effect on 6 April.
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Headline inflation has dipped slightly, from 3% to 2.8%, but the Bank of England expects it to rise again through 2025. UK interest rates remain elevated. And with borrowing running higher than anticipated, the Treasury’s room to support the economy is narrowing. The Chancellor’s £9.9 billion fiscal buffer has already been wiped out, leaving little scope for manoeuvre.
Instead, ministers are preparing to cut back. Departmental spending increases will be capped at just 1.3% a year, benefits are expected to be reduced, and 10,000 civil service jobs could go.
“A slow squeeze disguised as prudence”
“The result is a fiscal stance that doesn’t dare speak its name—but walks and talks like austerity-lite,” said Nigel Green. “It’s a slow squeeze disguised as prudence. But squeezing harder when growth is already weak is a recipe for stagnation.”
While the government has positioned itself as pro-deregulation, the business community is less convinced. Beyond some long-overdue trimming of outdated rules, little has been done to materially reduce the pressure on employers. In fact, many are now facing increased legal obligations and compliance costs that cut into productivity.
“With the current trajectory, recession risks are rising by the day,” Nigel Green added. “What we need now is a reset — one that backs businesses to invest, hire and expand. That means less tax, less drag, and a genuine shift in priorities.”
What we think
There is currently little sign that the new government has been able to turn the UK economy around, despite nearly eight months in power. External factors are still being blamed – e.g. the actions of the Trump administration. While global factors are important, more stimulus is needed to help small and mid-tier UK businesses, otherwise we will see unemployment start to creep up.
While the pound strengthened violently against the EUR during Reeves’ speech, it has given up a lot of that ground overnight and looks set to continue the trend it started over the weekend. It looks set to break the key 1.2 level by the end of the week.
