Bank of England Cuts Growth Forecasts Amidst Tax Hike Concerns

The Bank of England has significantly lowered its growth outlook for 2025, warning that the government's substantial tax increase could lead to higher unemployment than anticipated.

Economic Outlook

According to the Bank, the UK economy shrank by 0.1% after the Chancellor's budget announcement and is expected to barely expand in the first quarter of 2023. The overall growth forecast for the year has been revised down to 0.75%, compared to the previous estimate of 1.5%.

inflation rate is projected to rise to 3.7% by year-end, driven primarily by energy costs. However, the Bank signals its willingness to continue cutting interest rates despite inflation to mitigate the impact of rising energy bills.

Impact of Tax Hike

The Bank's report highlights concerns that the tax increases, particularly the rise in National Insurance, will disproportionately affect low-paid workers. Businesses are reportedly raising prices and cutting jobs more rapidly than expected due to these taxes.

Impact on Employment

The Bank warns that the tax changes may lead to reduced employment as businesses struggle to absorb the increased costs. This is particularly concerning for sectors with high labor intensity and minimum wage earners.

Public Sector Reliance and Productivity

The Bank notes that recent economic growth has been driven predominantly by the public sector, raising concerns about weak productivity growth. The government's plans to increase spending in sectors such as education and healthcare could further exacerbate this issue.

Bank's Response

Governor Andrew Bailey stressed the Bank's gradual approach to further rate cuts, considering the impact of higher taxes and global trade uncertainties. The Bank remains committed to maintaining low and stable inflation as the foundation for a healthy economy.

Implications for the Government

The Bank's warnings pose a significant challenge to the government's ambitions of boosting living standards and increasing employment. The government's tax strategy and spending priorities will likely face scrutiny in light of these economic concerns.