EY: Two years of slow UK growth means ‘increased chances’ of tax rises
Rachel Reeves may have to resort to reversing Labour manifesto tax pledges as UK growth fails to exceed one per cent for two years running, EY ITEM Club have said, in the latest blow to the chancellor’s fiscal plans
The Chancellor has been warned by several forecasters that President Trump’s tariffs will hammer the UK economy this year.
But leading consultancy EY has now suggested that low growth will seep into 2026, putting Reeves in a more difficult position ahead of this summer’s spending review and autumn’s budget.
She has reaffirmed Labour manifesto commitments stating income taxes, employee national insurance contributions, or VAT would not be raised while the top rate of corporation tax rates would not be capped at 25 per cent.
But EY ITEM Club’s chief economic advisor Matt Swannell has suggested that an ongoing global trade war will result in a “larger fiscal policy rethink”.
“The government’s fiscal headroom appeared narrow even before the shift in US trade policy, so this added uncertainty and detrimental effect on UK growth, has added further pressure,” Swannell said.
“We still think the government will just about meet its fiscal rules, but some headroom will need to be built back even before it thinks about additional spending in areas such as defence.”
“Previous pledges to avoid increases in income tax, employee national insurance contributions, VAT and corporate tax rates will limit the options to raise additional revenue, as these taxes make up more than half of the tax base,” he added.
UK exporters hope that the government can secure a trade deal with the US to avoid existing tariffs on vehicles and steel, as well as impending ten per cent tariffs on goods in less than three months.
But cabinet minister Pat McFadden raised concerns among businesses on Sunday morning when he told Sky News that a trade deal may not take place.
“I think an agreement is possible. I don’t think it’s certain. I think it’s possible. Far better to have the right agreement than to rush,” he said.
His comments came after Reeves met with US treasury secretary Scott Bessent as talks continue.
The UK is facing some difficulty in maintaining its balancing act between securing an agreement with the US while developing trade ties with the EU.
Ahead of her meeting on Friday, Reeves said economic relations with the European Union were “arguably even more important” given the UK’s larger trade levels with the bloc.
EY has suggested that European firms may export more goods to Britain as a result of Trump’s tariffs as firms look for “alternative markets to the US”. This would have the effect of weighing down on price growth in the UK.
“The inflationary effect of tariffs on the UK is less certain but, on balance, we expect it to weigh on inflation,” Swannell said.
“Falls in energy prices should, if sustained, translate into lower costs for consumers, while UK importers may also benefit from lower prices as Chinese and European exporters look to access alternative markets to the US.”
Swannell also warned that inflationary effects should not be ruled out.
“But the pandemic demonstrated that disruption to the cross-border flow of goods can have a powerful effect on inflation and it’s possible that the impact of tariffs may ripple through international supply chains and put upwards pressure on UK goods prices,” he said.
Such a scenario would compound existing pressures on prices brought by Reeves’ tax rises in last year’s Autumn Budget.