GDP set to soften in 2026 as tax hikes bite
The UK is set for another year of soggy growth, according to new forecasts from EY, with the government’s tax hikes and ongoing worries about a global trade war hamstringing momentum.
The Big Four firm predicted that GDP would rise 0.9 per cent in 2026, slower than the 1.4 per cent recorded last year, as the impact of last year’s Budget filters through the economy.
“Further tax rises may not be expected in 2026, but previously announced measures will begin to raise revenues, while the government will need to reduce borrowing and keep public spending steady in order to meet its fiscal rules,” Matt Swannell, chief economic adviser to the EY ITEM Club, said.
“This tightening of fiscal policy, alongside ongoing global uncertainty, is expected to drag on UK growth over the next year or so.”
The government announced tax rises of £26bn in the Budget, which will push the tax take up to 38 per cent of GDP by the end of the decade.
Alongside the impact of domestic policy, EY pointed to the disruption in the global economy as a key source of uncertainty for businesses.
Investment fall expected
Back in November, the accountancy firm predicted that investment would rise 0.8 per cent this year, but it now anticipates that it will fall 0.2 per cent, further weighing on economic growth.
Anna Anthony, UK and Ireland regional managing partner at EY, blamed the increasingly volatile macroeconomic environment for the expected investment slump.
“The start of 2026 has seen this uncertainty intensify once again, highlighting the turbulent market conditions that businesses continue to navigate and factor into their spending plans,” she said.
Already this year businesses have faced the threat of another round of tariffs following Donald Trump’s sabre-rattling over Greenland, although the President eventually pulled back.
The tariffs put in place last year have proved hugely disruptive to UK exporters, with a recent survey from Make UK showing that 20 per cent of factories have stopped or reduced exports to the US.
However, investment is expected to rebound 1.7 per cent in 2027 thanks to further interest rate cuts and the continued strength of corporate balance sheets.
Anthony said the government needed to “embed stability” into the UK economy in order to support long term investment decisions.
“Maintaining a steady, transparent and growth-oriented policy environment will build on the UK’s strengths as a stable, attractive investment destination in an otherwise unpredictable global landscape,” she said.