The UK’s slowing labour market is raising concerns that the economy may be edging towards a recession, according to the Resolution Foundation. The influential think tank warns that a 0.5% decline in employment over the year to January mirrors levels “only seen during a recession.”
Businesses are scaling back hiring due to rising payroll taxes and an increasing minimum wage, with many freezing recruitment altogether. Employers fear that upcoming rule changes in April, coupled with soaring energy and utility costs, will squeeze profit margins and dampen investment.
Fiscal Risks for the Government
The labour market downturn threatens to derail Chancellor Rachel Reeves’s fiscal strategy, potentially leaving a £15 billion shortfall in tax revenues. The Resolution Foundation predicts that with fewer employees paying taxes, the government will struggle to meet its fiscal targets. While Reeves previously maintained a £9.9 billion buffer in the autumn budget, the new projections suggest she could exceed her spending rules by over £4 billion.
Reeves has ruled out increases to income tax, VAT, or national insurance but may extend the freeze on income tax thresholds until 2029-30. Analysts estimate this move could generate around £10 billion, helping to offset falling revenues.
Pressure to Avoid Welfare Cuts
Amid growing economic uncertainty, there is also pressure on the government to avoid deep welfare cuts. Resolution Foundation research director James Smith cautioned against reducing benefits, warning that short-term savings could cause “real harm,” particularly to lower-income households.
Labour backbenchers are already pushing back against proposals to freeze or tighten eligibility for personal independence payments, a move that could see some individuals lose up to £675 per month. The debate highlights the political and economic challenges facing Reeves as she prepares for the upcoming spring statement.
Inflation and Borrowing Costs Rise
Economic conditions have deteriorated since last autumn’s budget, with growth now expected to slow to 1% in 2025, down from the previously forecasted 2%. Productivity growth remains weak, and the government’s borrowing costs are rising.
Inflation, fueled by higher energy and utility bills, is projected to reach 3.6% this year, up from the current 2.5%. Capital Economics estimates that this increase will add £1.2 billion to the government’s borrowing needs by the end of the decade. Meanwhile, rising bond yields—an indicator of public borrowing costs—could drive up debt interest payments by an additional £7 billion.
High-Stakes Spring Statement
With just days before the 26 March spring statement, Reeves faces mounting fiscal and economic pressures. A sluggish labour market, rising inflation, and increasing borrowing costs present a formidable challenge. As concerns of a potential recession grow, all eyes are on the chancellor’s response to ensure economic stability in the months ahead.
