Budget tax hikes from Chancellor to 'slam brakes on growth'

Tax hikes, tariffs and high interest rates will 'put a brake' on growth over the coming year, a report has warned.

Economic forecasting group EY ITEM Club, which uses the Treasury's model of the economy, has upgraded the outlook for gross domestic product (GDP) this year – but warned it will slow sharply in 2026.

EY's autumn projection comes ahead of the Bank of England's interest rate decision this Thursday.

There is growing speculation of a cut, which would provide a boost for millions of borrowers.

However, EY's experts expect rates to remain on hold, with just two cuts next year to take the Bank's rate down to 3.5 per cent.

Meanwhile, Rachel Reeves' second Budget as Chancellor three weeks from now is expected to deliver further punishing tax increases. And the trade wars launched by US President Donald Trump in April look set to further weigh on the economy.

Matt Swannell, EY ITEM Club's chief economic adviser, said the Budget – while likely to deliver painful tax hikes and spending cuts amounting to £30billion – may also bring in measures to boost growth.

He said: 'Nevertheless, the combination of potential tax rises, global trade disruption and high interest rates is still anticipated to put a brake on economic momentum and produce modest growth over the next year.'

EY predicts the economy will grow by 1.5 per cent this year – an upgrade compared to its previous prediction of just 1 per cent growth – after a better-than-expected performance so far in 2025. However, momentum is predicted to slow towards the end of the year 'due to the combined effects of a fragile global economy, tighter fiscal policy and reduced consumer spending power'.

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And annual GDP growth is expected to be reduced to a sluggish 0.9 per cent in 2026, the report added. The forecast comes as evidence mounts of the punishing impact that Labour is having on business.

Latest figures published over the weekend from the organisation of bosses, the Institute of Directors, showed that confidence among firms remains close to record lows as business leaders 'expect the worst' from the Budget.

Firms are still counting the cost of Labour's £25billion raid on employer National Insurance in last year's Budget, which has resulted in fewer jobs, higher prices and lower pay.

They are also worried about the impact of business rate reform which threatens to hurt larger High Street stores. A hike in the minimum wage this year is taking a big toll on costs, too. In addition, the Government's flagship workers' rights bill threatens to pile on more red tape.

Meanwhile, the darkening picture for the public finances has raised fears that companies will be hit with a fresh tax raid.

There are also concerns the Chancellor may put up income taxes in a breach of Labour's manifesto promises. If she does, that will also hurt firms by damaging consumer spending power.