Rachel Reeves's tax hikes and global worries set to scare off business investment
Britain's economy is set to slow sharply this year as global uncertainty and Labour's tax hikes slam the brakes on business investment.
In a report that will make bleak reading in Downing Street, the EY Item Club predicted 'subdued' growth of just 0.9 per cent for 2026.
That follows expansion of 1.4 per cent in 2025 and casts doubt on the Chancellor's claim that 'this is the year that Britain turns a corner'.
The forecast is far weaker than the 1.3 per cent growth expected by the Treasury – with any difference likely to lead to a shortfall in tax receipts and higher welfare spending.
This could blow a fresh hole in Rachel Reeves' plans – and even lead to another round of tax hikes in a Budget later this year.
'The UK economy is expected to grow modestly in 2026 as persistent global uncertainty leads to a contraction in business investment this year,' the Item Club said.
The report warned business investment is set to contract by 0.2 per cent this year. That compares with the 0.8 per cent increase it predicted in November – before the Chancellor's latest tax-raising Budget.
Britain's economy is set to slow sharply this year as global uncertainty and Labour's tax hikes slam the brakes on business investment. Pictured: Rachel Reeves
The report said 'global uncertainty and tariff disruption are expected to be the leading drivers of this subdued growth and are predicted to weigh on private sector confidence'.
But it added that 'fiscal policy' – such as tax hikes – and the end of the interest rate-cutting cycle 'are also expected to contribute to the modest economic outlook for 2026'.
The Item Club said it expects just one more cut in interest rates – to come in April this year – taking it down to 3.5 per cent.
A separate report from the Institute of Directors noted a rebound in business confidence at the start of this year – but said it has failed to translate into hiring or investment.
'Expectations for both headcount and investment remain in negative territory – marking the longest period of weakness in those areas of business spend in our survey's history,' said Anna Leach, the institute's chief economist.
'Overall, there's a sense that, while revenues and general conditions have stabilised, businesses are not yet ready to increase either their capital or labour costs materially.'
