KPMG warns of persistent fiscal pressures and subdued economic outlook
The UK is likely to see a sustained period of tax increases over the next decade as the government responds to slow economic growth and mounting spending demands, according to consultancy firm KPMG.
The company’s latest UK Economic Outlook forecasts that Chancellor Rachel Reeves will prioritise raising tax revenues rather than implementing significant cuts to public services in the upcoming Autumn Budget. It also predicts that UK GDP will grow by 1.2% in 2025 and 1.1% in 2026, marking a downgrade from earlier official estimates.
The report attributes the subdued outlook to weaker global trade, cautious consumer spending, and continued uncertainty over trade policy, all of which are expected to constrain business investment.
The government faces a budget gap estimated at £20 billion to £50 billion, partly due to sluggish growth and the financial impact of reversing previous policy decisions, such as abandoned welfare reforms and winter fuel payment reductions. Despite £40 billion in tax rises introduced in the October 2024 Budget, the deteriorating economic environment has increased expectations of further tax measures in the November autumn statement.
“While the economy showed resilience at the start of the year, the second half looks more uncertain,” said Yael Selfin, chief economist at KPMG UK. “Elevated tax burdens, weaker global trade and cautious consumers are likely to keep growth subdued into 2026.
“The government faces a tough balancing act. Mounting pressures on health and defence spending, combined with weaker growth, mean difficult fiscal choices ahead.”
As the government explores options to raise revenue, property taxation has come under renewed scrutiny. Reports first emerged in mid-August indicating that ministers were considering abolishing Stamp Duty in the forthcoming Budget, with a proposal to introduce a new tax on sellers of properties valued above £500,000. More recently, there have been suggestions that buyers could be permitted to pay Stamp Duty in instalments, spreading payments over several years rather than making a single upfront payment.
KPMG’s report warns that fiscal challenges will persist beyond the current budget cycle, with a “gradual ratcheting up of tax revenues over the next decade” anticipated as public spending outpaces economic growth.
The labour market is expected to weaken further, with unemployment forecast to rise as businesses delay hiring decisions. Vacancy numbers are projected to decline throughout the second half of 2025. Inflation is set to remain above the Bank of England’s 2% target until late 2026, potentially reaching 4% in the autumn. The report notes that “domestic services inflation remains particularly stubborn” as firms contend with higher costs, including Labour’s £25 billion national insurance increase.
In contrast to some other forecasts, KPMG expects the Bank of England to implement one more interest rate cut before the end of the year, reducing the base rate to 3.75%. Two further reductions are projected in 2026, potentially bringing the rate down to 3.25%.
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