KPMG: UK growth constrained for two years as Labour tax plan weighs on economy

KPMG UK warned that growth in Britain will remain subdued for two years as higher taxes under Labour weigh on activity. In its latest forecast, the consultancy projects output to rise 1.2% this year and 1.1% in 2026, well short of the Office for Budget Responsibility’s 1.9% forecast for 2026 in March.

Yael Selfin, KPMG's chief economist for the UK, said the economy showed resilience early in the year but the second half looks more uncertain. 'Elevated tax burdens, weaker global trade and cautious consumers are likely to keep growth subdued into 2026,' she said, adding that the government faces a tough balancing act as higher health and defense spending presses the public finances. The Chancellor was last week accused of creating an 'economic doom loop' by raising taxes rather than cutting spending, after unveiling £40b of tax rises in her first Budget last October.

KPMG also expects inflation to stay above the Bank of England's 2% target into late 2026, peaking near 4% this autumn, with high food prices weighing on households. Domestic services inflation remains stubborn, the report says, as Labour's £25b national insurance tax raid pushes up prices. The jobs market is forecast to deteriorate further in 2025 and 2026, with unemployment rising from 4.7% now to 4.9% next year.

On monetary policy, the report projects one more Bank of England rate cut by year‑end to 3.75%, followed by two further reductions in 2026 to 3.25%, even as inflation remains above target. The Bank’s path will hinge on the evolution of growth and price pressures in the coming months.

The forecast adds to the pressures Reeves faces ahead of the November Budget as she weighs how to close a fiscal gap estimated between £20 billion and £50 billion after about £40 billion of tax rises announced in her first Budget. Critics have argued that higher taxes, rather than spending cuts, risk creating a cyclically weaker economy, a theme that featured prominently in public debate in the weeks leading up to the forecast.

Taken together, the analysis underscores a tension between fiscal plans and growth prospects: weaker domestic demand, a softening jobs market and persistent inflation threaten to keep British households and businesses cautious through 2026, even as financial conditions gradually ease with lower interest rates.