EY Forecast: UK Growth to Stagnate Under Weight of Tax Rises and Global Headwinds
The UK's economic outlook for the year ahead remains constrained, with growth expected to be held back by a combination of domestic fiscal policy and persistent global uncertainties, according to the latest forecast from the EY Item Club.
While the forecaster marginally upgraded its 2026 GDP growth projection to 0.9% from 0.8%, it warned that the fiscal measures introduced by Chancellor Rachel Reeves in the autumn Budget—primarily tax increases and restrained public spending—will act as a brake on the economy for at least the next year. The UK's growth potential, the report suggests, remains a central concern.
"The government has built some valuable fiscal headroom, but the price is a near-term drag on growth," said Matt Swannell, chief economic adviser to the EY Item Club. "The previously announced tax measures are now beginning to bite, and meeting fiscal rules will require continued discipline on borrowing and expenditure. This necessary tightening, against a backdrop of global instability, is what's subduing our growth trajectory."
The report also revised down its estimate for 2025 growth to 1.4%, citing weaker-than-expected summer performance. Looking further ahead, GDP growth is forecast to reach 1.3% in 2026 and stabilize at 1.4% from 2028 onward.
Business investment is projected to contract by 0.2% this year, a sharp reversal from the 0.8% growth previously anticipated. A rebound is expected in 2026, contingent on anticipated interest rate cuts from the Bank of England.
The challenges are not solely domestic. EY highlighted that geopolitical tensions and trade disruption are additional weights on the private sector. A separate survey by Make UK and DHL underscored this, finding that one in five British manufacturers have reduced or halted exports to the US due to tariffs imposed under the Trump administration, with a quarter reporting direct balance sheet losses.
Compounding the growth debate, Rene Haas, CEO of British chip designer Arm, reignited concerns about the UK's business climate. In a recent podcast, Haas lamented the scarcity of venture capital and a perceived national "less appetite for risk," which he linked to Arm's decision to list in New York rather than London.
Reader Reactions
Michael Thorne, 52, Small Business Owner, Leeds: "As someone trying to plan for the next few years, this constant 'tightening' narrative is exhausting. We need stability and incentives to invest, not more warnings about what we can't do. The focus seems entirely on managing decline rather than sparking growth."
Professor Anya Sharma, 44, Economics Lecturer, University of Edinburgh: "EY's analysis is sober but not surprising. The fiscal rules the government has bound itself to leave little room for maneuver. The real question is whether this period of restraint can be used to implement structural reforms—in planning, skills, and capital markets—that actually improve our long-term growth potential. Arm's comments are a stark reminder of that latter challenge."
David Finch, 61, Retired Accountant, Bristol: "This is economic vandalism, pure and simple. We're taxing and regulating our most productive sectors into stagnation while the world moves on. The manufacturing survey says it all—we're becoming isolated. The Chancellor's policies aren't just dragging on growth; they're actively choking it. When do we start prioritizing wealth creation over redistribution?"
Sarah Chen, 38, Tech Startup Founder, Cambridge: "Haas's comments hit home. The capital and ambition gap between here and the US is palpable. If we want to compete, we need to stop punishing success and start fostering it. A 0.9% growth forecast isn't a plan; it's an admission of failure. We need a radical shift in mindset, from the Treasury down."