The UK’s slowing labour market is fuelling concerns that the economy could be drifting towards a recession, according to the Resolution Foundation.
The influential think tank reports that a 0.5 per cent drop in employment over the year to January matches levels “only seen during a recession”.
Businesses, many of which have frozen hiring or postponed recruitment drives, blame a cocktail of higher payroll taxes and a rising minimum wage. They fear that April’s rule changes, combined with soaring energy and utility bills, will squeeze margins and choke off fresh investment.
The labour market slump could blow a £15 billion hole in Chancellor Rachel Reeves’s fiscal strategy. The Resolution Foundation predicts that with fewer employees on the books, tax revenues will fall short of the government’s own targets. Reeves had previously balanced the books by a margin of £9.9 billion in the autumn but now risks breaching her spending rules by more than £4 billion.
James Smith, the Foundation’s research director, cautioned against hasty cuts to benefits that would particularly affect the poorest households. Labour backbenchers are already resisting plans to freeze or tighten eligibility for personal independence payments, which could see many people lose £675 a month. Smith argued that emergency short-term savings would cause “real harm”, urging the government not to pursue quick fixes that hamper longer-term welfare reform.
Reeves has maintained Labour’s pledge not to raise income tax, VAT or national insurance, although she could opt to extend the freeze on income tax thresholds to 2029-30—the year by which she must meet her key fiscal rule. Projections suggest this measure could raise around £10 billion.
All eyes are now on the Office for Budget Responsibility (OBR) ahead of the 26 March spring statement. Since last autumn’s budget, economic conditions have worsened and growth is expected to come in lower, at around 1 per cent rather than the previous 2 per cent forecast for 2025. Productivity growth—already weak since the pandemic—may also face further downgrades, inflating borrowing bills by tens of billions of pounds over the medium term.
Meanwhile, rising inflation, driven by energy and utility price hikes, is set to reach 3.6 per cent this year, up from the current 2.5 per cent. Capital Economics estimates higher inflation will add £1.2 billion to Reeves’s borrowing requirement by the end of the decade, and government bond yields—an indicator of public borrowing costs—have climbed, potentially adding £7 billion more in debt interest.
The chancellor has only days left to navigate these mounting pressures. With recession clouds gathering, sluggish hiring, and swelling costs, the spring statement promises to be a critical test of Reeves’s fiscal mettle.
