UK Faces Fiscal Tightening: Looming Tax Hikes to Slow Economic Growth

As the UK government prepares to unveil its budget on November 26, 2025, the country is facing the prospect of a significant economic slowdown next year. According to the latest analysis, the British economy is expected to eke out growth of just 0.5% in 2026, a sharp downgrade from the previous forecast of 1.5%.

The primary driver behind this gloomy outlook is the government's plan to raise taxes as part of its efforts to rein in the country's public finances. Chancellor Rachel Reeves is expected to announce a range of tax hikes, including potential increases in National Insurance and income tax, in a bid to close a fiscal "blackhole" estimated to be as large as £40 billion.

While the specifics of the upcoming budget have not yet been confirmed, the growing likelihood of these tax measures has prompted analysts at Morningstar to revise their growth projections for the UK. Morningstar UK economist Grant Slade warned that the "fiscal stance tightening in 2026" and the expected income tax hike are set to weigh heavily on the country's economic growth.

However, not all economists share this pessimistic view. Some, like Martin Beck from WPI Strategy, believe the UK's growth outlook is being overly criticized and that the economy will show similar strength next year. Beck argues that the Bank of England would likely cut interest rates to offset the impact of tax hikes, and that overseas fiscal stimulus and strong household finances could provide a boost.

Nonetheless, the majority of forecasters surveyed by HM Treasury expect GDP growth to slow to just 1.1% in 2026, down from 1.3% predicted earlier this year. With the government's fiscal tightening measures looming, the UK's economic trajectory remains uncertain, and the upcoming budget will be closely watched for its potential impact on businesses and households.