What to expect from UK tax rises, inflation, and rate cuts for the rest of 2025
The UK economy is expected to see modest growth over the next two years, with GDP forecast to increase by 1.2% in 2025 and 1.1% in 2026, according to KPMG UK’s latest Economic Outlook.
Despite early momentum in 2025, driven by lower interest rates and infrastructure investment, persistent global and domestic challenges are anticipated to drag on economic performance.
Business investment is forecast to rise to 1.9% this year, but downside risk from policy uncertainty and higher taxation remains. Meanwhile, consumer spending growth is projected at below 1% in both 2025 and 2026, as households gradually reduce savings in response to falling interest rates.
Trade disruption is also a factor. Exports to the US dropped 21% year-on-year by mid-2025 following the imposition of new US tariffs, reversing early gains in Q1.
“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,” said Yael Selfin, Chief Economist at KPMG UK.
Inflation and rate cuts
The group forecasts that nflation is expected to peak at 4% this autumn, with high food prices, labour costs and lingering global supply shocks all adding pressure.
Domestic services inflation remains particularly stubborn, with higher employer National Insurance contributions feeding through to prices.
KPMG UK forecasts inflation will return gradually to the Bank of England’s 2% target by the mid 2026, helped by easing import costs from a stronger pound and falling oil prices.
Despite elevated inflation, the Bank of England is still anticipated to lower interest rates once more in 2025, bringing the base rate to 3.75% by year-end. Two additional cuts are projected in 2026, taking the rate down to 3.25%.
“With inflation set to remain above target in the near term, the Bank is likely to proceed cautiously. However, with growth slowing and labour market slack increasing, further easing looks likely,” said Selfin.
Taxes and jobs
Tight fiscal conditions remain as the Autumn Budget approaches in November. Chancellor Rachel Reeves will be aiming to strike a balance between growth focused policy and fiscal discipline, but the challenging environment may suggest tax rises and public spending restraint, KPMG said.
“The government faces a tough balancing act. Mounting pressures on health and defence spending, combined with weaker growth, mean difficult fiscal choices ahead,” said Selfin.
UK labour market conditions are also predicted to deteriorate further in 2025 and 2026. Vacancies are down 44% from post-pandemic highs, particularly in manufacturing, retail and hospitality.
Unemployment is projected to rise gradually to 4.9% by 2026. Wage growth is also slowing, having declined to 4.8% in July.
It is forecast to fall to 3.8% by the end of 2025 and return to 3% by mid-2026, more in line with inflation targets.
