Britain is heading for recession – but the government will do nothing
Recession is coming to Britain's stagnant economy. If the chancellor had any courage, she would cut taxes. But she is too cowardly to act, says Matthew Lynn
Recession is coming. Any hopes chancellor Rachel Reeves may have had of keeping her promise to make Britain the fastest-growing economy in the G7 have surely finally been dashed. Last week, the OECD think tank warned that Britain would be hit harder than any other
Britain's ideologically driven commitment to being the world leader in hitting net-zero carbon emissions means we already have to import most of our energy and prices are now rising out of control. Likewise, in February, retail sales fell back again, and that was before the impact of the conflict in the Middle East fed through to the data. Jaguar Land Rover temporarily suspended production at its Solihull plant over a supply issue, while shoe chain Russell & Bromley collapsed into administration, knocking out yet another high-street stalwart. It is hardly an encouraging outlook.
It is going to get a lot worse. The living wage went up on 1 April, rising by another 4.1% to £12.71 an hour, piling more costs onto employers. From the start of the new tax year, both companies and individuals will be hit with a whole blizzard of tax increases. Business rates will go up sharply as reliefs are withdrawn, with the vast majority of companies having to pay up regardless of whether they are making any money or not. Council taxes will go up, with a typical rise of 5% across England and Wales. The higher rate of tax on dividends and savings and rental income also comes into force, hitting anyone running a small business hard. Even more landlords will give up, making the rental market even worse than it already is.
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Frozen tax thresholds will mean that even a modest annual pay rise, and one that barely keeps up with rising inflation, may well take you into a higher tax bracket, and mean that you end up with hardly any extra take-home income (and we all know what kind of impact that will have on incentives to work. Even air passenger duty will go up yet again, making it more expensive to get out of the country if you have had enough of all the other tax rises. The list goes on.
The rises are bad enough in themselves, but the real problem is the timing. Reeves has adopted a strategy of pre-announcing tax rises: in each Budget, she sets out a series of increases that will start to bite a year, or even two or three, out. To the officials at the Treasury, that may seem clever. It allows the Office for Budget Responsibility to say that the books will be balanced, at least one day in the future if not right away. It keeps the bond market happy, so long as no one digs too deeply into the numbers. It allows spending to be increased right away, keeping the backbenchers happy, and the actual pain of the tax increases is a long way off so no one complains about it too much.
Risk of recession means the chancellor needs to act
The trouble is, the moment when taxes go up steeply always arrives one day. The blunt reality is this: no one in their right mind would think that Britain in April 2026 is a country where everyone needs to be forced to pay more to the government. The economy has stagnated and is at risk of sliding into a recession. The Iran war means energy costs are exploding and the Bank of England may have to raise interest rates twice or more before the end of the year, instead of reducing them as had been expected.
Against that backdrop, you would expect the chancellor to be cutting a few taxes and announcing some targeted infrastructure spending to cope with any rise in unemployment, to try and support the economy. But it is too late to change course now. The plan has already been set and the machinery of taxation moves relentlessly forward, with zero flexibility and without any ability to respond as the outlook for the economy changes.
If the chancellor had any courage she would postpone many of the tax rises due to come into force this week. Instead, she would embark on a long-overdue review of public spending, identify savings, stop spending such insane amounts of money on welfare, and find a way to convince her party that the money had run out. She would, after all, have a convincing story to tell.
Unfortunately, Reeves is neither brave nor clever enough to attempt that. Instead, business and consumer confidence will be crushed even further – and a recession now looks close to certain.
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