Tax rises and spending cuts to hit UK growth in 2026: EY
The EY ITEM Club has upgraded its forecast for UK GDP growth in 2025 from 1% to 1.5% after the economy displayed a greater momentum than expected throughout this year.
However, the EY ITEM Club Autumn Forecast predicts a slowdown in growth towards the end of 2025 due to the combined effects of a fragile global economy, tighter fiscal policy and reduced consumer spending power. UK GDP is forecast to grow by 0.9% in 2026, before accelerating to 1.3% in 2027.
The UK economy accelerated at a faster than expected rate over the first half of 2025, growing by 0.7% and 0.3% in Q1 and Q2 respectively, largely due to increases in government spending. Upwards revisions to past estimates have also helped to boost growth expectations for the year. However, the EY ITEM Club expects activity to slow towards the end of 2025 and into 2026.
This is partially due to anticipated fiscal tightening to be announced at the Autumn Budget, which is expected to include revenue-raising measures and spending cuts to address the UK’s estimated fiscal shortfall of between £25bn and £30bn.
While the Budget is expected to include measures to stimulate growth, meeting the Government’s current fiscal rules would also require some tax changes to be introduced in the coming tax year, and this is anticipated to weigh on growth.
“The UK economy has shown encouraging resilience and momentum this year, particularly in the face of significant global disruption. While growth is forecast to continue, we expect a slowdown as tariff challenges and the delayed effects of high interest rates weigh further on economic activity going into next year,” said Anna Anthony, EY UK & Ireland Regional Managing Partner.
The Autumn Budget presents an opportunity to shape the UK’s economic trajectory, and striking a balance between managing the deficit and measures that stimulate growth will be key, she added.
“The UK has remained a competitive, stable investment destination during a period of international disruption, and preserving that attractiveness and welcoming global capital will be crucial to the UK’s long-term economic prosperity.”
Business investment set for slowdown
The EY ITEM Club has upgraded its forecast for business investment growth for 2025 to 3.7%, up from 1.2% predicted in July.
This is primarily due to several large one-off projects undertaken at the start of the year related to aircraft purchases, which lifted capital investment growth to 4.1% in Q1. The impact of these measures unwound in Q2, with business investment falling back by 1.1%.
Growth in business investment is then expected to slow to 0.8% in 2026, partially due to uncertainty in the global economy and the challenging worldwide trading environment caused by tariffs.
Potential tax rises in the Autumn Budget could also impact private sector investment levels, albeit this will be highly dependent on the specific measures announced.
Nevertheless, the 0.8% growth in investment forecast for next year still represents an upgrade to the 0.0% predicted in July, with a gradual fall in interest rates expected to boost business investment later in 2026.
