The latest quarterly economic forecast from the EY Item Club report shows that the government’s tax hikes and spending cuts will slow the UK’s economic growth this year.
The economic report shows that for 2026 gross domestic product (GDP) will fall back to 0.9%.
Business investment will stall as companies will come under pressure and EY is forecasting a 0.2% contraction compared to 0.8% predicted growth in November.
Matt Swannell, chief economic adviser to the EY Item Club, said, “The autumn budget saw the Government build a healthier degree of fiscal headroom, although some of the more substantial measures won’t take effect for a couple years.
“In the meantime, further tax rises may not be expected in 2026, but previously-announced measures will begin to raise revenues while the Government will need to reduce borrowing and keep public spending steady in order to meet its fiscal rules.
“This tightening of fiscal policy, alongside ongoing global uncertainty, is expected to drag on UK growth over the next year or so.”
Swannell added, “Easing inflation and falling interest rates should improve consumer sentiment, but this will be countered by slowing pay growth and rising unemployment levels.
“Nonetheless, the current confidence gap between high and low earners is unusually wide and, as households on greater pay start to feel more upbeat, we can expect slowing real income to be cushioned by a reduced focus on saving.
“This should support continued consumer spending growth this year and next, albeit at a modest level.”
