Zarah ChoudharyThe market is showing signs of being in recession, with employment falling at a rate consistent with an economic downturn, according to the Resolution Foundation.
This comes as the country faces weaker growth, higher interest rates, and lower tax revenues, factors that could prompt fresh fiscal tightening in the Chancellor’s Spring Budget on 26th March.
Economic forecasts have worsened significantly since the Autumn Budget, with GDP expected to be 1.2% lower than previously projected, inflation 0.4 percentage points higher, and interest rate expectations also rising by 0.4 percentage points.
The Resolution Foundation estimated that these changes will lead the Office for Budget Responsibility (OBR) to revise its projection for the public finances, shifting from a £9.9bn surplus in 2029-30 to a £5bn deficit.
Without additional fiscal measures, the Chancellor is at risk of breaking the Government’s newly legislated fiscal rules.
The Foundation has warned that the UK economy remains sensitive to global market volatility, with the cost of borrowing at risk of rising further if decisive action is not taken.
To address this, the Government is likely to consider spending cuts or tax increases.
While previous Governments have cut public investment in similar situations, the new fiscal framework provides no incentive to do so this time.
Instead, reductions in public services, welfare, or tax rises appear more likely.
One option under consideration is reducing the spending envelope in the upcoming Spending Review, cutting the real-terms increase from 1.3% to 1.2% annually from 2026-27 to 2029-30, which would save £3bn by the end of the period.
However, this comes at a time when Government departments classified as ‘unprotected’ are already facing cuts of £9.7bn next year, which could put further pressure on services such as social care, the justice system, and policing.
The Government is also reportedly considering reforms to incapacity and disability benefits, particularly Personal Independence Payments (PIP), in an effort to curb rising spending.
However, the Resolution Foundation cautioned that PIP is not directly linked to employment, and cutting it could have severe financial consequences for vulnerable groups.
A £5bn cut to PIP in 2029-30, for example, could result in 620,000 people losing an average of £675 per month.
Around 70% of these cuts would affect families in the lower half of the income distribution.
The Foundation has urged ministers to ensure any changes focus on improving the system rather than creating sudden income shocks.
As an alternative to spending cuts, the Foundation suggested extending the freeze on personal tax thresholds for an additional two years, until 2029-30, which could generate £8bn in revenue.
This approach, it argued, would avoid immediate impacts on living standards, as the policy would only take effect from April 2028.
The majority (80%) of the additional tax revenue would come from households in the upper half of the income distribution.
With the fiscal outlook deteriorating and key economic indicators signalling a downturn, the Chancellor’s upcoming budget will be closely watched as the Government seeks to balance economic stability with public service funding and employment support.
James Smith, research director at the Resolution Foundation, said: “The UK’s economic outlook has declined markedly since the Budget last Autumn.
“Weaker growth and higher interest rate expectations look set to turn the UK’s projected current surplus of £10bn into a deficit of around £5bn.
“The Chancellor must act decisively to meet her fiscal rules.
“But with the jobs market in recession territory, lower income households shouldn’t bear the brunt of any consolidation.
“Crucially, she should avoid turning the Spring Statement into a ‘sticking plaster’ Budget, with long-term thinking on welfare reform undermined by the quest for short-term savings that could cause real harm.
“And with Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future Budgets even more challenging to deliver.”
