UK growth to slow and business investment to contract amid tax hikes

Britain's economic growth will slow sharply in 2026 as tax hikes and spending cuts are expected to continue having an impact, according to a report.

The latest quarterly economic forecast from the EY Item Club sees gross domestic product pulling back to 0.9% in 2026.

While this is a slight upgrade on its previous prediction for 0.8% growth, it marks a steep slowdown from the forecasted 1.4% for 2025.

Business investment is also expected to slam into reverse as firms come under pressure, according to EY, which is forecasting a 0.2% contraction in 2026, down from the 0.8% growth predicted in November as global uncertainty also takes its toll.

Matt Swannell, chief economic adviser to the EY Item Club, said: "The autumn budget saw the government build a healthier degree of fiscal headroom, although some of the more substantial measures won't take effect for a couple years.

"In the meantime, 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.

"This tightening of fiscal policy, alongside ongoing global uncertainty, is expected to drag on UK growth over the next year or so."

It comes ahead of the Bank of England's interest rate decision and latest forecasts on Thursday, which is widely expected to see the bank rate held at 3.75%.

The EY Item Club is forecasting one further rate cut this year, in April, as inflation eases to the 2% target by the middle of the year.

This will offer a little boost to homeowners and businesses but will do little to change the lacklustre economic outlook as unemployment is set to increase, according to the report.

Swannell said: "Easing inflation and falling interest rates should improve consumer sentiment, but this will be countered by slowing pay growth and rising unemployment levels.

"Nonetheless, the current confidence gap between high and low earners is unusually wide and, as households on greater pay start to feel more upbeat, we can expect slowing real income to be cushioned by a reduced focus on saving.

"This should support continued consumer spending growth this year and next, albeit at a modest level."